Q2 2019 Earnings Call

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Good morning, everyone I would like to welcome you to Boise Cascades second quarter 2019 earnings call and business update.

Of our building materials.

Thank you for your patience.

Participating on the call remotely today, so Nate will step in.

Our GAAP net income to EBITDA.

EBITDA I will now turn the call over to Nate.

Liberal operator.

Thanks, Good morning, everyone.

Down from one dollar six per share in the year ago quarter.

Quarter 2018 results included $9 million net after tax.

Salt of lower commodity wood products.

[laughter].

Total housing starts were flat compared to the same period last year.

Your family starts the primary driver of our sales decreased 6%.

Our multi family starts increased 16%.

Our operating performance in both businesses was quite good considering the environment consistent with our strategy. The volatility of our earnings has continued to decline as we emphasized growth.

Distribution in engineered wood products.

Our wood products manufacturing business reported segment income of $18.9 million in the second quarter compared to 36.5 billion in the year ago quarter.

Our building materials distribution business reported segment income of $33.8 million on quarterly sales of $1.1 billion for the second quarter compared to $47.7 million segment income on a quarterly sales of 1.2 billion and the comparative prior year quarter.

We will walk through the financial results in more detail and then I'll come back to provide our outlook for before we take your questions.

Thank you Nate Im on slide four wood product sales in the second quarter, including sales to our distribution segment were $334 million down 21% from second quarter 2018.

Approximately will it leave one third of the decline in sales is due to the asset sales or closures in the last 12 months.

As Nate mentioned wood products reported segment income of $18.9 million in the second quarter compared to $36.5 million in the prior year quarter.

Reported EBITDA for the business was $33 million down from the $55.9 million of EBITDA reported in the year ago quarter.

<unk> conference operator will be with you momentarily.

To lower sales prices of plywood.

It related downtime due to.

That conditions.

Thank you for your patience.

Underway on the recently installed assets at our tester facility.

The negative earnings impacts were offset partially by higher net engineered wood products sales prices lower oriented strand board costs used in the manufacture of I joist.

And decreased log costs as well as lower employee related expenses.

BMD sales in the quarter were 1.1 billion down 10% from second quarter 2018.

Sales prices declined 12%, but sales volumes were up 2%.

Excluding the impact of the acquisitions made in the last 12 months the sales decline in BMD would have been approximately 12%.

BMD reported segment income of $33.8 million or EBITDA of $38.8 million. This compares to segment income of 47.7 million and EBITDA of $52.2 million in the prior year quarter.

The decline in income was driven primarily by our gross margin decrease of $10.6 million.

Resulting from lower average commodity prices compared with second quarter of 2018.

And a $3.6 million increase in selling and distribution expenses.

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 $7.3 million in second quarter, 2019, compared with negative $22.3 million in second quarter 2018.

As a reminder, second quarter 2018 results included $12 million of noncash pension settlement charges.

As we move through the balance of this year our earnings comparisons to 2018 should be taken with due consideration of the restructuring activities, we undertook last year.

We have included a summary of last year's items and the earnings impact in the appendix to our slides.

Excluding restructuring related items wood products third quarter, 2018, EBITDA would have been $43.7 million.

And fourth quarter wood products EBITDA would have been a positive 11.5 million.

Turning to slide five.

Our second quarter sales volumes for LDL in I, joist were down, 5% and 11%, respectively compared with second quarter 2018.

Our volume declines for each WP were roughly in line with energy industry production figures for second quarter. So we believe the weaker volumes are reflective of the slower building season. This year.

You did BP consumption was also influenced by the mix of single family and multifamily starts.

Median single family home size as well as the home Foundation type.

The starter home in the southern us using concrete slab on grade construction use as far less I joist for example than a two storey home in Denver with either across space or a basement.

Pricing in the second quarter for LDL in I, Joist was up 2% and 5% from the year ago quarter, reflecting pricing actions taken in early 2018 and ongoing management of our customer programs.

Turning to slide six our second quarter plywood sales volume in wood products was 343 million feet compared to 369 million feet in second quarter of 2018.

The lower volume for plywood sales reflects downtime for facility capital improvements and in response to weaker market conditions as well as the sale of our mature plywood facility during the first quarter of this year.

The $272 average plywood net sales price in second quarter was down 28% from second quarter 2018.

July's plywood pricing this year was more than 25% below levels experienced in third quarter 2018.

Moving to slide seven.

BMD second quarter sales were $1.1 billion down 10% from second quarter 2018.

By product area BMD sales of commodity products decreased 25%.

General and product sales increased 9% and MWP sales decreased less than 1%.

The gross margin percentage for BMD in second quarter was 12.4% 40 basis points higher than second quarter 2018. However, the gross margin dollars generated in second quarter 2019 were 10.6 million below the prior year quarter because of price deflation.

BMD EBITDA margin was 3.5% for the quarter down from the 4.3% reported in the year ago quarter.

Looking forward, we anticipate that commodity products pricing in the third quarter of 2019 will remain low compared to historical levels.

However, we do not expect a substantial downward price volatility in gross margin erosion like we experienced in the third quarter of 2018.

On slide eight we have set out the key elements of our working capital company net working capital excluding cash income tax items and accrued interest decreased $33.2 million during the second quarter.

Both businesses reduced inventories during the quarter in response to the lower than expected demand environment.

Accounts payable decrease from first quarter due to payments made on extended term payables and lower inventories.

Accounts receivable increased with the seasonal increase in sales and accrued liabilities grew due to employee related compensation and customer rebates.

This statistical information filed as exhibit 99.2 to our 8-K has the receivables inventory and accounts payable data broken down by segment for those that are interested in the detail.

Im now on slide nine we finished second quarter with 202 million of cash our total available liquidity at June Thirtyth was approximately $568 million, which reflects our cash as well as the availability under our committed bank line.

Our capital spending excluding acquisitions is expected to be between 85, and 95 million. This year as we execute strategic projects at our manufacturing operations in Chester South Carolina.

In Florien, Louisiana.

We continue to expect our effective book tax rate to be approximately 26% going forward.

I will now turn it back over to Nate to discuss our outlook.

Thanks, Wayne Im on Slide 10, the July consensus for 2018 US housing starts is 1.24 million, which is slightly lower than 2018, we believe important economic drivers behind the demand for new construction.

Like job formation remain in place however, affordability issues in many metropolitan areas and the availability of construction labor continue to influence the pace of activity.

With housing starts expected to remain relatively flat in the second half of the year. We continue to focus on the areas, where we rolled to drive both revenue and earnings improvement.

In wood products, we are focused on successfully completing our strategic capital projects and reducing controllable costs through our operational excellence initiatives.

When considering the lower plywood pricing environment and also adjusting third quarter 2018 to exclude an $11 million impairment charge related to asset sales, we expect wood products year over year financial comparisons to be negative in the third quarter of 2018.

For BMD. The team continues to make good progress on seeking acquisitions and targeted geographic markets looking at product line extensions and pursuing other avenues to drive sales and earnings with a more stable price environment. We expect BMD to report improved year over year financial results in the third quarter of 2018.

We welcome any questions at this time Vincent would you. Please open the phone lines.

Overtime will like to remind everyone in order to answer a question. Please press Star then the number one in your telephone keypad.

Hey, how are you first question comes from the line of Brian Macquarie. Your line is now open.

Hey, good morning, guys.

Good morning, Brian .

Wayne just a question on the.

The plywood operating rates into Q and just in general.

How much volume you might infer stake in given the pricing environment and.

Any kind of color our outlook for Threeq, you on any sort of economic downtime planned you'd had in wood products.

Yes, Brian This is Mike Brown.

You might address that yes in the in the prior quarter. We've certainly took outages as wind indicated provide capital and market related issues.

Year over year, I think that was approximately 50 odd million feet of volume that we lost.

Going forward in this quarter, we have a small amount of capital activity that we're going to implement and of course the amount of validation that we will take related to market really depends on what happens with pricing. So we don't have a specific plans that I could speak to for the next couple of months.

Okay and then just.

Bigger picture of sort of wondering.

As others are taking some downtime some permanent.

Closures some of those maybe not starting until later in the quarter.

You guys have a sense on how impactful that will be to the market supply and demand and.

As you think we're getting enough announcements that we might start to see wood products prices lift a little bit later in the quarter as some of that capacity does come offline.

Brian This is Wayne headed I think the capacity withdrawals, particularly the two large LSB plants in western Canada that are slated to come out this quarter will be helpful. But.

Kind of offsetting that I would say is the demand environment continues to be flat at best and most of the most of the country.

And the other thing is with the.

Relative currency.

Exchange rates and with the economic weakness in Europe , we are seeing.

Increasing import activities on a number of products into the U.S. So.

We really don't see a lot of relief from the.

Capacity utilization rates later, this quarter and into fourth quarter.

Okay. Thanks, and just last one from me.

Obviously really good gross margins and distribution given the volatility in prices.

Just wondering if there's anything one time or unusual in there obviously the volatility was a little unusual but.

You know thinking about that 12 for.

Margin going forward.

Is that something that you think you could be able to repeat or.

We might expect it will be a little bit lower going forward.

Brian again, this Wayne and now I'll, let Nick China equity wants at a lot of it frankly has math. So if you look at our second COVID-19 sales Max.

41% was commodities, which is reflective of the huge deflation we've seen on lumber LSB on plywood.

If you go back a year ago second quarter. It was almost 50% of our sales and as a general rule commodities carry a lower gross margin percentage.

Than the general lighting category and the WP, so with commodities again, dropping about eight percentage 0.9 percentage points of the sales mix. That's part of the reason were strong as we are at the 12 for.

And.

Likewise, that's why the operating costs are a little bit higher as a percent of sales that are generally more handling activity.

Associated with the general liner with DWP category than there would be on the commodities.

Got it makes sense I appreciate it thanks.

Thank you.

Next question comes from the line of George Staphos. Your line is now open.

Hi, Thanks, very much how are you guys. Congratulations on the quarter certainly better than what we were looking for.

Couple of things number one maybe piggybacking off of Brian's question. So can you comment a bit further in terms of what you're seeing over the last two three months.

From an import standpoint on plywood and if there's a way to size it versus where you're seeing earlier in the year or on a year ago basis that'd be helpful to start.

So.

If I just look at Brazil.

This is in thousands of cubic meters just to give you a sense yet.

We are already in April 81000.

In may.

92.4.

In in June 78.8.

But importantly.

If you look at what was exported out of Brazil through the first six months.

The us got 38.6% of Brazil's exports.

If I look at the number for full year 18.

The U.S. got 32.8% of Brazil's exports.

So again, the relative economic activity in currency exchange rates.

And by the way this is true on.

Lumber as well.

And.

Increasingly on engineered wood so.

I think to the extent, we end up with a strong us dollar and better economic activity here than what people are seeing in Europe , or South America, we're likely to see inbound.

Imports increase in a lot of our product lines.

Is the.

WP level of importation.

Sizable on now.

Sufficiently sizable to actually impact your your commercial strategies and in Europe .

And your your.

Go to market.

Pass I wouldn't have thought that either DWP would be that susceptible to enforce but if there's been any change I'd be curious.

George It's a niche organization I think the what we see from Europe is generally.

Tied to kind of a specific geographic part of the U.S. centrally to east coast and more in the northeast and yes.

Relative to the demand.

It has at the margin, we certainly see the influence relative to volumes and pricing when when material shows up at the port. So it's something I would say, it's not material, but but nonetheless, it does have a have an impact in select markets and as we described just given the.

The currency and the opportunity that reside here relative to Europe . We begun we continue to become an important part of that that product mix.

Understood.

Two last ones and then ill turn it over one.

In wouldn't you performed better than I was looking for from an operating standpoint, I mean, that's neither here nor there are necessarily but.

War your operations as you would have expected and was performance a bit better than expected can you talk about what the puts and takes in terms of manufacturing more for you in the quarter.

Beyond the obvious downtime and then.

One thing that we've been.

Tracking is your commentary on on veneer, and obviously, you've got fluorine you've got Chester is there a way that you could size for us how much of a near you will have available when you're done.

With the projects.

Middle of next year available for the market relative to what would've been the case, a year ago and five years ago in other words how much.

No external availability or supply do you have now of in year I remember that once a strategic I seem to remember it being a strategic imperative for you guys. Thank you.

Yes, sure George I'll have a stab at this and then im fuel wine will chime in as well and on the manufacturing side.

We've been concentrating now for quite a long time on now prices improvement in reliability efforts.

And they are starting to pay dividends.

So while we were down in terms of volume, which obviously doesn't help.

The the fact that we study based on fruit from our concentrated efforts around process improvement is starting to bear rounding up cost structure.

Now we've got a long way to go when we're going to continue to focus our efforts on those particular locations that have the largest absolute opportunities. So.

More news there as we move through the next year or two.

The the veneer availability.

Yes so.

I guess I would summarize it like this.

If you go back a number of years, we would probably all thinking that we would have housing starts in the vicinity of $1.5 million right. So.

We are gearing up for such alive and so.

If it turns out not to be the case, which is the wise looking at the moment, we we shouldn't have any available forum for sale, if things turn out to be proportional.

Now I don't have the numbers right in front of me that could tell you exactly how much will have any or we would have available for sale because that depends largely on what happens to our internal demand for DWP.

Yes, I think you're aware of the way, we run our operations and we try and put as much money as possible that entirely Wi Fi as opposed to plywood you sure is about yes.

So.

If one has some additional comments Mike could do besides bring a while he's.

Adding any color you'd like that.

Yes, so on the manufacturing cost.

The probably the biggest things that are favorable this year relative to a year ago as we've seen obviously, a big drop in our speed, which is the input cost for that I joists, and we use up roughly one square one square foot of LSB for every lineal foot of I joist.

And if you do the math.

Certainly the first and second quarter relative to the year ago quarters that was a big positive and we've seen log costs fall in the Pacific Northwest, which we are getting some benefit from we still have timber under contract that were working through.

But those are a couple of the big positives on the manufacturing side as well as not.

Dragging around some of the locations, we closed and sold that really weren't adding positively to our EBITDA.

On the veneer situation a couple of years ago. When we were tighter on veneer, we were buying about 100 million feet of linear.

And that has largely gone away and to Mikes point with the improvements we just completed at Chester and with a plan log yard improvements in flooring and the flow through into the.

Delays and downstream through the dryers.

We will have additional veneer and.

Mikes point of housing starts stay flat at $1.3 million, it's unlikely that we will need all of the internally generated veneer and the thing we're working on.

Pretty strongly as to try to get more of our engineered wood products into the multifamily channel into light commercial construction and with the changes in the building code where people will be able to do eventually 18 story would structures, we're going to try to get more DWP type products.

In some markets other than single family, New RASM and we're hopeful that.

Over time and it won't be immediate I don't think its second half a 19 or early twenties.

Adventure, but if we can we can do that over time, then we should get revenue and earnings growth by taking more of the veneer into engineered wood and not be solely beholden to what's going on in single family.

Makes sense. Thank you Wayne.

Next question comes from the line of Mark Wilde. Your line is now open.

Good morning.

Morning, Mark.

I Wonder if we could start off just by getting some sense of how you guys see inventory in the channel right now kind of across the particularly the commodities.

Mark Good morning, this is Nick Stokes.

I think if you think about the general line business inventories in those products as you well know tend to not be volatile in terms of pricing. So.

Generally dealers have invested in.

Enough to keep them busy now that things are busier relative to the.

Seasonal cycle.

I think in terms of engineered wood is much the same thing stability in pricing confidence in those price levels and so guys are pretty good in terms of those inventories I think on the commodity side given the.

Lack of confidence in price appreciation and the relative ease at which people can get those products.

I don't think there is an abundance of those products in the market, but I don't think theres any shortages either so I think the.

Southern market for WP next year.

Whether you've seen any impact from that yet I don't know whether theyre ceding the market, but just how you think that may play.

Mark. This is this is when I think of the latest timing we've seen on the Roseburg LDL facility in South Carolina is that it's a fourth quarter start no need to go through the certification process.

So we don't think we're likely to see big price impact this year as a result of that facility.

And again, depending on what regional demand as we would expect that's applied to meaningfully come online in early 2020 for the building season.

It will really be the pace at which rose Byrd brings that facility up and where the regional demand is.

Well determine how much pricing impact, but clearly if you're thinking about potential headwinds in 2020.

Unless we get it.

Reinvigoration of housing starts that capacity that the market essentially doesn't need.

The good news is its a non integrated facilities. So they don't have a good.

Of the near production facility that they're going to feel obligated to run they can buy veneer in the open market and and paste the production through that facility based on market conditions.

Okay. All right Thats helpful. And then just you WP pricing has been doing very well I think you were kind of you're up on it.

Year over year basis pretty nicely I, just wondered between kind of.

Demand.

Being a little softer than any of us expected.

And costs for things like like always be having gone down.

How you think about sort of maintaining price.

Markets nature organization.

I think in terms of the kind of the marketplace as it exist today, I think as Wayne kind of alluded to good supply demand balance and so.

We're experiencing that today and.

Yes, we are expecting that here through the balance of the quarter.

I think if you look at pricing in general that the 2018 price increase that has been.

Fully concluded so that work is.

And those gains of our in place and behind Us.

And as you describe in terms of going forward.

There has been limited issues in market in terms of competitive issues, but.

As we go through the course of the year.

We would expect those likely to increase that and perhaps in combination with road roseburg capacity.

That certainly has some potential headwinds on MWP pricing, but as we sit here today things are in pretty good balance and we would expect that to continue for.

Through the third quarter as we get into fourth quarter, we'll see how rosebrock comes up along with general market conditions at that point.

Okay that seems reasonable and the last one I had.

For weighing and that's really around the.

The balance sheet the balance sheet is very strong year, yes.

100 million Bucks in cash.

I just wondered how you guys are thinking about sort of potentially returning more cash.

To shareholders as you did through the additional dividend last year.

Versus M&A and I have to assume that.

This lower trajectory on the housing market might be starting to manifest itself in valuations on potential M&A candidates or maybe you could also kind of confirm or deny on that one.

I guess the way I would describe it as.

We think seller expectations have come down there are a few.

Things that we have seen come across in terms of the potential targets.

We are still looking for acquisitions principally to fill in the network for distribution and look at some adjacencies theres been a couple of smaller things on the manufacturing side.

So we are particularly as we go through.

The middle part of this year hanging on to some cash just given what could be potential transactions.

But having said that as we get deeper into the year. It doesn't look like there are any transactions.

Out in front of us that are going to use that capital.

As you noted we have been pretty good stewards with shareholder money, we think and we will.

Obviously engage our board on.

How best to return capital to shareholders. If we don't have other places to put it and we feel good about where we are from a leverage standpoint.

But again I think the deal sizes were typically going to see mark are going to be 150 million.

And we feel good that we can obviously fund one or more of those off our balance sheet, if they come in they probably to.

The only headwind on the acquisition front is the.

Private equity guys are flushed with money at the moment.

And so we will be thoughtful in terms of what were willing to pay on multiples, but again, if we don't.

Fine good uses for the money to grow the business organically.

And don't.

And acquisitions that we think are at appropriate valuations we will.

Find a way to get the money back to shareholders.

Okay. That's that's fine thanks, Wayne and I'll turn it over.

Our next question comes from the line of Chip Dillon Your line is open.

Hi, good morning, everyone. Thanks for all the details.

First question not to pin you down, but just to make sure we're kind of thinking in the right ZIP code here.

Yes, the second quarter, you did very well I'm looking for example at the EBIT basis in BMD.

You did 34 million and you're saying that you feel you will be up year over year in the third quarter I notice most years, though that sequentially. The third quarter is a little bit tough to match.

Sorry, the second quarter it tends to be the best quarter, often and I didn't know if you had a shot at hitting or getting close to what you did in the second quarter of this year in the third quarter in BMD.

Yeah, and then I think.

The the guidance the reason we split the guidance between the two businesses, we really see them in different directions at this point.

If I look at the 28, we did a year ago on BMT in the 38.

Point $8 million of EBITDA, we did in this quarter.

I think some of it will depend on commodity pricing, but.

But again, we feel really pretty good about the activity rate, we're seeing from builders.

I think we will have a pretty decent September and October .

So I I wouldn't be too few from against the 39 million but.

I feel really good about the volumes and I think the volumes will be probably more supportive in third quarter.

Than we saw in second quarter, just as the weather continues to improve.

In BMD.

Okay.

Gotcha. Okay. That's that's very helpful. And then just to kind of update us on the moving parts are the plywood market you mentioned and thanks for the details about the.

The activity I think you just mentioned Brazil.

I kind of think in very round numbers that the plywood market North America's somewhere around 10 billion square feet give or take and so I would guess that.

You know the numbers you're talking about represent about 4% of the market is that the right ZIP code that is when you convert to square meters into board feet and you look at sort of an annual rate of it looks like it's about.

Looks like a million.

Square meters coming in every year.

So the volume out of Brazil, and Chile, as yet kind of all of the imports it's been bouncing around Africa pullet numbers, but it's been in the 15% range.

I would tell you a chip that that that is not the issue for plywood this year.

The big issue for plywood as Weve come from $400 LSB something that in a lot of cases, just starting with the one I think last time I just looked at prices in the south.

I was just trying to like 155, and so where we had in the first half of 18 plywood being drug up by LSB.

This year the price differentials are quite large.

And so we're seeing a migration back to the normal end uses for LSB and particularly new routes.

Plywood is not typically competitive other than areas, where there's a zoning issue and as long as we see.

$150 price gaps between LSB in plywood, that's where you're going to see the biggest substitution the Brazil to your point the endpoints are noise relative to what the LSB overhang is doing and if you look at the volumes from a PPA I think Oh, let's be was up a couple of percentage points versus a year ago and plywood was off I think in the quarter about 5% on volume and again I think it's reversed substitution back into LSB with the pricing off as hard as it is and Thats, probably the biggest thing pressuring plywood this year compared to a year ago.

Okay that makes total sense, that's very helpful and said differently, if we see a surge in no SP that could.

That could create a little more.

Substitution backup into plywood.

If that if that happens.

Yes.

I see so you would have to see sustained LSB prices north of 300, I think before you have signing about plywood.

And I'm not.

I understand and can you just update us when all the sort of said and done at Chester in fluorine, maybe 2021 ish, let's say.

I'm sure I would assume your plywood capacity is somewhere around two and a half will be and is around 2.5 billion square feet and just remind us how much you think.

You know if the housing market is healthy and so you keep growing MWP and let's say, we get 2 million 3 million four starts how much of that two and a half billion or whatever that capacity as do you think would would would be sold on the open market versus what would be used in your internally.

So I think for modeling purposes.

You know I would model somewhere 1 billion for 2 billion five feet on an annual basis as plywood.

And.

I am hopeful that any incremental volume and veneer that we get out of either Chester or fluorine or some of the operational improvements that Mike described.

That we can figure out how to get those into AWB and get them into an end market, where we get paid better than plywood.

Hi.

This this for US is really about trying to grow the engineered wood business, including different end applications, we are not.

Sitting around structurally and viewing plywood as a growth market or something that's going to compete effectively against.

Oh, SB and traditional residential housing applications.

So really hits.

It's about trying to get what used to be 25.

A couple of years with the lumber and Particleboard mill closure sale and.

Buying.

More distribution locations.

Your Capex of 85 to 95 this year.

Directionally, where do you think that goes in 20 and 21.

Please be as specific as you feel comfortable I know its before budgeting season.

Well I think for 2000 and you can count on 85 to 95, I don't see it going down given the project we've got at Florien, Louisiana.

And then.

Forward from that.

Well evaluate obviously based on economic conditions, and what we need to do in the business.

Directionally given the number of mills, we hadn't would I would be surprised to see our base capital drop.

Much below kind of $55 million to $60 million and in distribution just given the size of the franchise that Nick and his team have managed to bill that's probably a 20 fiveish kind of number and then we usually have a couple of million dollars incorporate around IP. So I'd, probably give you that for directional guidance I think.

We saw.

Continued pressure on pricing or if the economy were to go into recession, obviously, we can flex down from that as appropriate.

But I think for the number of facilities, we run and would be 55 to 60 is probably a good place holder number much of that.

Focused on.

Maintenance and upgrades that.

Keep us in the cost position we're currently in.

Makes total sense. Thank you so much.

You're welcome.

Your next question comes from the line of Rueben Garner Your line is now open.

Good morning Rubin. Thanks.

Good morning.

So I know the past or recent months have been kind of the starts have been disproportionate in the south and southeast and Thats kind of impacted demand on the hydro lists for your AG was business. What is your kind of or what are your conversations with your customers telling you about the outlook for that.

Or I guess geographically, where the where the construction is going to be over the next year year and a half.

So robin I'll take the first part and I'll, let Mike chime in I mean part of the reason you're seeing such negative comps compared to 18.

As we had an unusually warm winter in the west.

In the first part 18.

And so the I joist demand in the Western Us places like.

Denver, Oregon, Washington, et cetera was exceptionally good in 18, so thats part of the reason you're seeing the step change down at 19, as we had a more normal winter in the west.

Than a year ago, but.

As a general rule to the extent, you're seeing a lot of housing activity in the U.S South southeast.

That's generally less favorable for I joist and if you have.

Very low lumber prices you will see some of the guys that are doing offsite framing.

Move to lumber, but does it as a general rule, we feel very good about the efficiency of that product and what it does for builders in terms of quality on labor efficiency.

And.

I think we feel okay about the the I joist line holding in.

Maybe a couple of points below single family starts just given that geographic shifts and the content on where.

Houses are being built but we don't see a lot of reverse substitution once builders.

Get used to using the product and get the labor savings and the quality advantages, we don't see a lot of reverse switching and most of what we're seeing in the declines is geographic shifts and warehousing as akorn.

Got it very helpful. And then secondly, recognizing this can go a longer term question, but you mentioned different end markets.

We've seen the some legislation passed in the mass timber market.

Anyway, you guys can talk about the potential for that market and your participation.

How you go about doing it is it something where you leverage your existing assets or you have to make investments to do so.

Yes, Reuben so this is Mike.

Yeah, you're right I mean, it's.

In theory, it's a huge market.

Equivalent in terms of magnitude to the current markets that we play in terms of single family multifamily. So there's certainly a huge demand in the commercial area.

Yes, the rate of adoption.

Mass timber into that area, yet to be seen but it certainly.

It's got a lot of attention recently and.

The approach that we've taken is that we've set up a group within the company that is focused on that.

Now there are some products that we make today that I think that can be.

Gain some some share in what I'd call the commercial area and that's why we focused on it but there are some other aspects of mass timber that we didn't play in today and.

Wine amongst others, including Tom Corrick.

I've spent some time in Europe looking at how that.

Market works and what the get go to market approaches. So over the next 12 to 24 months, we'll be looking very closely at either opportunities that exist for us to getting quickly or whether we should take a sort of a more organic approach, but it is our intention to spend time and effort looking at how we can move into some of our existing products will the I'll call them, the new wood based products.

Into that particular that sector.

Great. Thanks, guys.

Welcome.

Next question comes from the line, Steve Steve Church over your line is now open.

Thanks, Good morning, Stephen.

So it's kind of late in the Q on a so forgive me if some of these are follow ons, but.

Starting with the Capex Chesterton flowing.

Can you carve out of the 85 to 90, how much is specifically at improving those two assets what type of returns you're expecting when it's all said and done.

So.

Those two projects on an annual basis, probably elevated the capital spending by about 10 million Bucks in wood.

So instead of 55 call it 65.

And in Chester.

We bought that Mel in late 2013, and we've done that in a protracted rehabilitation process to get it up to a reliability and mechanical condition that we're comfortable with.

Having that mill in and putting it in a lower cost position. So I would tell you the replacement of the equipment on log utilization center the things we've done to improve the delays and the green end.

And the new dryer are.

Largely maintenance for placement of obsolete.

Pour machine centers. So we are expecting labor savings some better product quality.

And modest incremental throughput.

But that was we're placing worn out tired parts of that mill.

And again, we feel very good about the steps we've been taking over the last five years to recapitalize that mill.

And Im fluorine, it's somewhat of a similar case, we put in a very large new dryer that Scott high automation better labor efficiency.

And we've kind of put that overall mill rehabilitation on hold.

After we made the Georgia Pacific acquisition.

And we Hadnt made the improvements in the log yard and then delays to get the full amount of the near through to the dryer.

And that we put in so thats. This project that we have underway that will finish up midyear 2020 is related to allow us to get more logs processed efficiently through the front end of the complex and two delays.

And with that we'll be able to get the veneer off the delays and into the new large dryer and again that will.

The market allows.

Meaningfully increase our self sufficiency of veneer going into the Alexandria should we find ourselves in a position where we're back towards a million 4 million five housing starts.

Okay, and and the return on the return on its pretty favorable, but I would tell you that a lot of the return.

Will be driven by.

Getting more product out of the overall system, if we find ourselves.

You know at a million three housing starts and for some reason we aren't able to penetrate.

Multifamily in some of the other areas like commercial we will have more capacity than we need based on current demand.

So it's not so much large incremental EBITDA that we should be adding to our target more like the ability to survive and or participate.

Well again I think.

As Mike mentioned, we may be able to sell from Fannie or to other engineered where producers or plywood producers but.

My hope is that we can fine.

Outlets in the non single family Arena that will allow us to suck up have been arrows incremental DWP production and if we can do that the economics become.

Pretty good.

But as Mike said that's.

Thats still in the development phase yet to be proven that we can do that and the volume that.

As meaningful and obviously, we're putting a lot of time and energy into it because we think it's pretty important and thats under our control.

But I wouldn't model it into your 2020 numbers for example.

Got it and like many of us I'm I'm fascinated by this whole CLP explosion I see it going up around me here in Oregon.

But when you talk about the Incrementals in here.

It's something that you again.

Could help provide new entrants, but it doesn't.

Despite what Tom is doing over in Europe . It doesn't sound like there's anything imminent, what youre going to be a CLP producer.

Well this will.

I don't want to overstate this but the US is late to the game.

Europe , if you look at Austria in a number of other countries have been building larger wooden structures with.

With timber.

For a long time, so part of it is as the building code has changed here in the us.

We were.

I think smart enough to say hey, there is a couple of contrasting trip that I've been doing this for decades.

Australia has also made considerable progress and so we said rather than reinvent the wheel, let's go see how they've done it what engineering resources have they put to what channels do they go through.

And now let's figure out how we can participate.

In the us in a way that makes sense for our shareholders and if you look at a number of the large land low.

Landlords.

Lend lease for example, there is a huge project at Google and others are trying to do up in Toronto.

I think it's called sidewalk labs.

So it's really are there things coming out of Europe that we see getting adapted either through the landlord channel or people.

Looking at what's been done in Europe , and adapting it to North America, given the changes in the U.S. building code and we want to try to be part of that mix and both in manufacturing distribution, we think theres a market opportunity there and we really want to figure out how we can play that makes sense for our shareholders.

Got it thanks, a lot last one.

With respect to the bolt ons that you've done in distribution.

I don't think these have been particularly.

Material in and of themselves so is the real opportunity.

Two.

Expand your product lines through those facilities and maybe reduce freight.

I don't think it about big otherwise.

Yes, if you look at.

I'll take Nashville for example, it was that was one of the first ones we did.

They had been selling Boise Cascade DWP for a long time.

But relative to the Nashville market and relative to the presence we see in our system like in Denver, Salt Lake Houston Dallas.

They were underpenetrated.

So Nick and his guys have been spending a lot of time.

With the Nashville location.

Alongside what we've had historically, a memphis and Atlanta.

Targeting the right growth opportunities and Nashville, and to your point with the right working capital investment and investment in property. We think we've got an ability to dramatically ramp up.

The activity levels in the Nashville, the same would be true in the acquisition, we made in Cincinnati and our intent would be to do that in Birmingham as well I think Medford.

Oregon very small location.

It operates in some ways more as a satellite branch of our Vancouver, Washington.

But clearly Cincinnati Nashville, and Birmingham, we went to those with a view that we could.

Significantly expand our revenue footprint and frankly do more in.

Traditional commodities them, what any of those three were doing on their own and get more big box and some of the national players into that customer mix.

Are there any other glaring holes that I'm looking at one of your presentations.

Since.

Something where you'd want to be.

Yeah.

So the most glaring hole that I had always talked enough about is.

I look at like Austin, San Antonio and again, we service those markets today.

Out of a combination a houston Dallas and occasionally Albuquerque.

But if you look at West, Texas, and given the economic activity and and.

There is an opportunity for us there.

Gulf Coast region. There is a couple of spots and again, we in our investor deck, and we'll put a new went up from here. Shortly we actually have a map that shows housing start activity and proximity of our DMD branches and we've made it.

Fairly easy to go look at the color coding you can figure out where we're underrepresented relative to housing starts.

But it's really important for us when we go in particular, if we're going to do it through acquisition, we have really good alignment with the key vendors.

And the management team and the culture fits the last thing we're going to do is.

By somebody Who's got in some ways the wrong set of vendors and we certainly are going to bring anybody on the playing field that doesn't want to behave.

In a culture consistent with the way we behave.

Got it okay. Thanks, Wayne Thanks, everyone.

The next question.

Next question comes from the line of George Staphos. Your line is now open.

Hi, guys, just a quick one to finish up here for Wayne and Mike.

You know if you look at the areas the mills that you're targeting for the next levels of investment and this piggyback a little bit on on the prior question how much of the benefit to earnings you think is volume dependent and how much would actually show up.

Almost irrespective of the single family start environment. If you. If you had a size and total what kind of pickup should we expect to see to normalized cash flow and results from those investments. Thanks, guys and good luck in the quarter.

You may or may not fully appreciate that answer I would say without volume.

We would get if you were look very little turnover.

Yeah, it's maybe.

25 Bucks out of 100.

There's way more leverage on the earnings if we get incremental volume, particularly in get it through the WP.

But again, we think it's important that we do thats the cost structure on those mills and market position and.

One.

Macro issue that were.

Paying a bit of attention too.

It is obviously a lot of activity east of the Mississippi from a housing standpoint in general economic activity.

And the one thing I would point out on lumber LSB imply would as as the production capacity in North America migrates to the south.

That is largely a truck step market.

And if you think about western Canada, and particularly the upper east to upper reaches far from the border.

Almost exclusively a rail market with very long lead time.

So.

We think for the distribution business and our manufacturing footprint. It is increasingly important.

If we pay attention to the manufacturing cost and pay attention to the fact that down through the channel.

This behavior of being just in time on inventories.

May become more prevalent as as more of the industry becomes a truck market versus the rail market and again that's a.

Along.

Migration of capacity, but we think it's been underway for a number of years and is likely to continue.

So low cost capacity in the south is really important to our company.

Understood well I'll turn it over thanks, and good luck in the quarter.

Thank you.

There are no further questions presenters. Please continue.

Tom you want to do the closed.

You bet happy to do it later, so I want to thank everyone for joining us today.

As we discussed earlier, we're really pleased with our results in the second quarter as our efforts to reduce our exposure.

The commodity pricing by growing DWP.

And distribution are beginning to show real impact.

As we look forward, we see more of the same flat housing and pricing compared to current levels at least for the remainder of 2019.

I want to close up by just saying thanks again for calling in we really appreciate your interest in Boise Cascade.

I Hope you have a great day and good bye.

This concludes today's conference call you may now disconnect.

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