Boise Cascade, L.L.C.

Good morning. My name is Vincent, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Boise Cascades second quarter 2019 conference call. All lines have been placed on me to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during that time, simply press star then the number one on your telephone keypad. Questions will be taken in the order they are received. If you would like to withdraw a question, press the pound key. 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 the future performance and the company undertakes no duty to update them. Although these statements reflect management's expectations today, they are subject to a number of business risks and uncertainties. Actual results may differ materially from those expressed or implied in this call. For a discussion of the factors that may cost actual results to differ from the results anticipated, please refer to Boise Cascade's recent filings with the SEC. It is now my pleasure to introduce to you to Wayne Rancourt, Executive Vice President, CFO, and Treasurer, Boise Cascade. Mr. Rancourt, you may begin your conference.

Thank you, Vincent. Good morning, everyone. I would like to welcome you to Boise Cascade's second quarter 2019 earnings call and business update. Joining me on today's call are Tom Cork, our CEO, Nate Jorgensen, our Chief Operating Officer, Mike Brown, Head of our Wood Products Operations, and Nick Stokes, Head of our Building Materials. distribution operations. Tom is participating on the call remotely today, so Nate will step in and provide the executive summary comments, and we'll wrap up with our outlook. Tom will be available for the Q&A session. Turning to slide two, I would point out the information regarding our forward-looking statement. The appendix includes reconciliations from our GAAP net income to EBITDA and adjusted EBITDA. I will now turn the call over to Nate.

Thanks, Wayne. Good morning, everyone. Thank you for joining us for our earnings call today. I'm on slide three. Our second quarter sales of $1.2 billion were down 13 percent from second quarter 2018. Our net income was $27.7 million, or 71 cents per share, down from $1.06 per share in the year-ago quarter. Second quarter 2018 results included $9 million of net after-tax losses, or 23 cents a share, from non-cash pension settlement charges. Overall, the second quarter of 2019 results reflected weaker financial performances in both businesses, principally as a result of lower commodity wood products pricing. Total housing starts were flat compared to the same period last year. Single-family starts, the primary driver of our sales, decreased 6%, while multifamily 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 emphasize growth in 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 million 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 comparative $47.7 million of segment income on quarterly sales of $1.2 billion in the comparative prior year quarter. Wayne will walk through the financial results in more detail, and then I'll come back to provide our outlook before we take your questions.

Thank you, Nate. I'm 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 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. The decrease in EBITDA was due primarily to lower sales prices of plywood and and lower sales volumes of VWP and plywood, as well as higher per-unit conversion costs. The per-unit production costs were impacted by capital project-related outages at our Chester, South Carolina mill and market-related downtime due to weaker market conditions. Commissioning is currently underway on the recently installed assets at our Chester facility. The negative earnings impacts were offset partially by higher net engineered wood product sales prices lower oriented strand board costs used in the manufacture of iJoyce, 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%. DMD reported segment income of $33.8 million or EBITDA of $38.8 million. This compares the 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 a gross margin decrease of $10.6 million, resulting from lower average commodity prices compared with second quarter 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 non-cash 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 LVL and I-JOIS were down 5% and 11%, respectively, compared with second quarter 2018. Our volume declines for EWP were roughly in line with industry production figures for second quarter, so we believe the weaker volumes are reflective of this lower building season this year. EWP consumption is also influenced by the mix of single-family and multifamily starts, median single-family home size, as well as the home foundation type. A starter home in the southern U.S. using concrete slab-on-grade construction uses far less I-joys, for example, than a two-story home in Denver with either a crawl space or a basement. Pricing in second quarter for LVL and Ijoist was up 2 percent and 5 percent 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 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 Moncure 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's second quarter sales were $1.1 billion, down 10% from second quarter 2018. By product area, BMD's sales of commodity products decreased 25%. General line product sales increased 9%, and EWP 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's 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 and gross margin erosion likely 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 decreased 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. The statistical information filed as Exhibit 99.2 to our 8K has the receivables, inventory, and accounts payable data broken down by segment for those that are interested in the details. I'm now on slide nine. We finished second quarter with $202 million of cash. Our total available liquidity at June 30th 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, and Florine, 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. I'm on slide 10. The July consensus for 2019 U.S. 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 will 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. By 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 2019. For BMD, the team continues to make good progress in seeking acquisitions in 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 2019. We'd welcome any questions at this time. Vincent, would you please open the phone lines?

At this time, I'd like to remind everyone, in order to ask a question, please press star, then the number one in your telephone keypad. You have your first question comes from the line of Brian McGuire. Your line is now open.

Hey, good morning, guys. Good morning, Brian. Wayne, just a question on the plywood operating rates in 2Q and just in general, how much volume you might have forsaken given the pricing environment and any kind of color or outlook for 3Q on any sort of economic downtime plans you'd have in wood products?

Yeah, Brian, this is Mike Brown. Might address that. Yeah, in the prior quarter, we certainly took outages as Wayne indicated for both 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 outage that we will take related to market really depends on what happens with pricing so we don't have a specific plan that I could speak to for the next couple of months.

Okay. And then just, you know, bigger picture sort of wondering, um, as others are taking some downtime, some permanent, uh, closures, some of those maybe not starting, um, till later in the quarter. Um, do you guys have a sense on how impactful that will be to the market supply and demand? And, um, you know, do you think we're getting enough announcements that we might start to see what products prices lift a little bit later in the quarter as some of that capacity does come offline?

Brian, this is Wayne. I think the capacity withdrawals, particularly the two large OSB 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 in 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 in distribution given the volatility in prices. I was wondering if there's anything, you know, one time or unusual in there. Obviously the volatility was a little unusual, but thinking about that 12.4 margin going forward, is that something that you think it could be able to repeat, or we might expect it'll be a little bit lower going forward?

Brian, again, this is Wayne, and I'll let Nick chime in if he wants. A lot of it, frankly, is math. So if you look at our second quarter 19 sales mix, 41% was commodities. which is reflective of the huge deflation we've seen on lumber, OSB, and 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 line category in the EWP. So with commodities, again, dropping about 8 percentage points, 9 percentage points of the sales mix, that's part of the reason we're as strong as we are at the 12-4. And Likewise, that's why the operating costs are a little bit higher as a percent of sales. There's generally more handling activity associated with the general line and with the EWP category than there would be on the commodities.

Got it. Makes sense. Appreciate it. Thanks.

Thank you.

Next question comes from the line of George Staffos. 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. A 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 what you're seeing earlier in the year or on a year-ago basis that would be helpful to start?

So... If I just look at Brazil, this is in thousands of cubic meters, just to give you a sense. We were in April 81,000, in May 92.4, and in June 78.8. But importantly, if you look at what was exported out of Brazil through the first six months, the U.S. 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 and 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 U.S. 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 EWP level of importation sizable now, sufficiently sizable to actually impact your commercial strategies and your products? go to market. In the past, I wouldn't have thought that EWP would be that susceptible to imports, but if there's been any change, I'd be curious.

George, it's Nate Jorgensen. I think what we see from Europe is generally tied to kind of a specific geographic part of the U.S., centrally the East Coast and more in the Northeast. Yep. Relative to the demand, it has, at the margin, we certainly see, you know, influence relative to volumes and pricing when material shows up at the port. So it's something I would say is not material, but nonetheless, it does have an impact in select markets. And as Wayne described, just given the currency and the opportunity that resides here relative to Europe, we continue to become an important part of that product mix.

Understood. Two last ones, and then I'll turn it over. One, in wood, you performed better than I was looking for from an operating standpoint. I mean, that's neither here nor there necessarily, but were your operations as you would have expected? Was performance a bit better than expected? If you can talk about what the puts and takes in terms of manufacturing were for you in the quarter, you know, beyond the obvious downtime. And then, you know, one thing that we've been... tracking is your commentary on veneer, and obviously you've got fluorine, you've got chester. Is there a way that you could size for us how much veneer you'll have available when you're done with the projects in the middle of next year, available for the market relative to what would have been the case a year ago and five years ago? In other words, how much fluorine you know, external availability or supply do you have now of a near? I remember that was once a strategic, I seem to remember it being a strategic imperative for you guys. Thank you.

Yeah, sure, George. I'll have a stab at this and then I'm sure Wayne will chime in as well. On the manufacturing side, you know, we've been concentrating now for quite a long time on our process improvement and reliability efforts and they're starting to pay dividends. So while we were down in terms of volume, which obviously doesn't help, the fact that we're starting to bear some fruit from our concentrated efforts around process improvement is starting to bear out in our cost structure. Now we've got a long way to go and 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 veneer availability, yeah, so I guess I'd summarize it like this. If you go back a number of years, we were probably all thinking that we would have housing starts in the vicinity of 1.5 million. So we were gearing up for such a life. And so if it turns out not to be the case, which is the way it's looking at the moment, we should have veneer available for sale if all 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 more veneer we would have available for sale because that depends largely on what happens to our own internal demand for EWP. I think you're aware of the way we run our operations and we try and put as much veneer as possible into our EWP as opposed to plywood. Sure. There's a balance there. So if Wayne has some additional comments, maybe I could do a bit of ciphering here while he's adding any colour he'd like to add.

Yeah, so on the manufacturing cost, probably the biggest things that are favorable this year relative to a year ago is we've seen obviously a big drop in OSB, which is the input cost for the I-joist. And we use roughly one square foot of OSB for every lineal foot of I-joist. And if you do the math, certainly first and second quarter relative to the year-ago quarters, that was a big positive. And we've seen Log Cost Fall in the Pacific Northwest, which we are getting some benefit from. We still have timber under contract that we're 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 years ago when we were tighter on veneer, we were buying about 100 million feet of veneer. And that has largely gone away. And to Mike's point, with the improvements we just completed at Chester and with the planned log yard improvements in fluorine and the flow-through into the lathes and downstream through the dryers, we will have additional veneer. And to Mike's point, if the housing starts to 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 is pretty strongly is 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 wood structures, we're going to try to get more EWP-type products into markets other than single-family new res. And we're hopeful that over time, and it won't be immediate, I don't think it's the second half of 19 or early 20 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 Wild. Your line is now open.

Good morning.

Good morning, Mark.

I wonder if we could start out just by getting some sense of how you guys – see inventory in the channel right now, kind of across 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, it's 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's an abundance of those products in the market, but I don't think there's any shortages either. So I think they're kind of matching the demand against the supply side in terms of timing, price, and risk. Okay.

All right. I wondered, Nick, if we could also just talk about the new entrant that will be coming into the southern market for EWP next year, whether you've seen any impact from that yet. I don't know whether they're seeding the market, but just how you think that may play.

Mark, this is Wayne. I think the latest timing we've seen on the Roseburg LVL facility in South Carolina is that it's a fourth quarter start and they'll need to go through the APA certification process. So we don't think we're likely to see big price impacts this year as a result of that facility. And again, depending on what regional demand is, we would expect that supply to meaningfully come online in early 2020 for the building season. And it will really be the pace at which Roseburg brings that facility up and where the regional demand is will determine how much pricing impact. But clearly, if you're thinking about potential headwinds in 2020, unless we get a reinvigoration of housing starts, that's capacity that the market essentially doesn't need. The good news is it's a non-integrated facility, so they don't have a veneer production facility that they're going to feel obligated to run. They can buy veneer in the open market and pace the production through that facility based on market conditions.

Okay. All right. That's helpful. And then just, you know, EWP pricing has been doing very well. I think you were kind of up on a 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 OSB having gone down. How do you think about sort of maintaining price?

Mark, it's Nate Jorgensen. I think in terms of kind of the marketplace as it exists today, I think as Wayne kind of alluded to, good supply-demand balance. And so We're experiencing that today and are expecting that here through the balance of the quarter. I think if you look at pricing in general, the 2018 price increase, that has been fully concluded. So that work is – and those gains are in place and behind us. And as you described, 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 Roseburg's capacity certainly has some potential headwinds on EWP pricing. But as we sit here today, things are in pretty good balance, and we would expect that to continue through the third quarter. As we get into fourth quarter, we'll see how Roseburg comes up along with general market conditions at that point.

Okay, that seems reasonable. The last one I had is for Wayne, and that's really around the balance sheet. The balance sheet, you know, is very strong. You have a couple hundred 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. So maybe you could also kind of confirm or deny on that one.

I guess the way I would describe it is 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. There's 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, if 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've 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 we're typically going to see, Mark, are going to be under $50 million. And we feel good that we can obviously fund one or more of those off our balance sheet if they come in. Probably the only headwind on the acquisition front is the private equity guys are flush with money at the moment. And so we will be thoughtful in terms of what we're willing to pay on multiples. But again, if we don't find good uses for the money to grow the business organically and don't find acquisitions that we think are at appropriate valuations, we will find a way to give the money back to shareholders.

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

Next question comes from the line of Chip Dillon. Your line is now open.

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. The second quarter you did very well. I'm looking, for example, at the EBIT basis in BMD. You know, you did $34 million, and you're saying you feel you'll 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 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 I think the guidance, the reason we split the guidance between the two businesses is we really see them in different directions at this point. You know, if I look at the 28 we did a year ago on BMD and the 38.8 million of EBITDA we did in this quarter, I think some of it will depend on commodity pricing. 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, you know, I wouldn't be too firm 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? Yeah. Gotcha. Okay, that's very helpful. And then just to kind of update us on the moving parts of the plywood market, you mentioned, and thanks for the details about the activity, I think you just mentioned Brazil. I kind of think in very round numbers that the plywood market in North America is somewhere around $10 billion. 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 the square meters into board feet and you look at sort of an annual rate of, it looks like it's about, it looks like a million square meters coming in every year.

So the volume out of Brazil and Chile at the end, kind of all of the imports. It's been bouncing around. I'd have to go pull the numbers, but it's been in the 15-ish percent range. I would tell you, Chip, that that is not the issue for plywood this year. The big issue for plywood is we've come from $400 OSB to something that, in a lot of cases, is starting with a one. I think last time I just looked at prices in the South, OSB is trading at like $155. And so where we had in the first half of 2018, plywood being drug up by OSB. This year, the price differentials are quite large. And so we're seeing a migration back to the normal end uses for OSB and particularly new res. Plywood is not typically competitive other than areas where there's a zoning issue. And as long as we see $150 price gaps between OSB and 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 OSB overhang is doing. And if you look at the volumes from APA, I think OSB was up a couple 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 reverse substitution back into OSB with the pricing off as hard as it is. And that's 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 OSB, that could create a little more substitution back up into plywood if that happens.

Yeah, you would have to see sustained OSB prices north of 300, I think, before you saw any benefit from plywood. And I'm not pulling my breath.

I understand. I understand. And can you just update us when all is sort of said and done at Chester and Florine, maybe 2021-ish, let's say, I would assume your plywood capacity is somewhere around two and a half, will be and is around two and a half billion square feet. And just remind us how much you think, you know, if the housing market is healthy and so you keep growing EWP, and let's say we get to a million, three million, four starts, How much of that $2.5 billion or whatever that capacity is do you think would be sold on the open market versus what would be used internally?

So I think for modeling purposes, I would model somewhere $1.4 billion to $1.5 billion on an annual basis as plywood. And I am hopeful that any incremental volume in 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 EWP and get them into an end market where we get paid better than plywood. 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 OSB in traditional residential housing applications. So really, it's about trying to get what used to be 25% or 30% of revenue in DWP. The more we can push that towards a 50% number or north of 50%, that does really good things for our economics and really good things for our earning stability.

Yep, I get that. And last question is, you know, there's been a lot of moving parts the last couple of years with the lumber and particle board mill closure sale and you know, buying more distribution locations. Your CapEx of 85 to 95 this year, directionally, where do you think that goes in 20 and 21? And, you know, please be as specific as you feel comfortable. I know it's before, you know, budgeting season.

Well, I think for 20, you can count on 85 to 95. I don't see it going down given the project we've got at Florine, Louisiana. And then forward from that, you know, We'll evaluate, obviously, based on economic conditions and what we need to do in the business. Directionally, given the number of mills we have in wood, I would be surprised to see our base capital drop much below kind of $55 million, $60 million. And in distribution, just given the size of the franchise that Nick and his team have managed to build, that's probably a $25-ish kind of number. And then we usually have a couple of million in corporate around IT. So I'd probably give you that for directional guidance, I think, You know, if 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 in wood, 55 to 60 is probably a good placeholder 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 Ruben Gardner. Your line is now open.

Good morning, Ruben.

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 that's kind of impacted demand on the iJoyce. What are your conversations with your customers telling you about the outlook for that, or I guess geographically, where the construction is going to be over the next year, year and a half?

So, Ruben, 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 2018 is we had an unusually warm winter in the west in the first part of 2018. And so the I-JOIS demand in the western U.S., places like Denver, Oregon, Washington, et cetera, was exceptionally good in 18. So that's part of the reason you're seeing the step change down at 19 is 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-JOIS. And if you have very low lumber prices, you'll see some of the guys that are doing off-site framing move to lumber. But as a general rule, we feel very good about the efficiency of that product and what it does for builders in terms of quality and labor efficiency. And I think we feel okay about the I-joist volume holding in maybe a couple points below single-family starts, just given the geographic shifts in the country 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. I think most of what we're seeing in the declines is geographic shifts in where housing is occurring.

Got it. Very helpful. And then secondly, I know recognizing this is a longer-term question, but you mentioned different end markets. We've seen some legislation passed in the mass timber market. Any way you guys can talk about the potential for that market and your participation, how you would go about doing it? Is it something where you'd leverage your existing assets or you'd have to make investments to do so?

Yeah, Reuben, so this is Mike. Yeah, you're right. I mean, in theory, it's a huge market. equivalent in terms of magnitude to the current markets that we play in in terms of single-family and multi-family. So there's certainly a huge demand in the commercial area. Now, the rate of adoption of mass timber into that area is yet to be seen, but it's 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's focused on that. There are some products that we make today that I think that can be – gain 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 don't play in today and Wayne amongst others, including Tom Corey, have spent some time in Europe looking at how that market works and what the go-to-market approach is. So over the next 12 to 24 months we'll be looking very closely at either opportunities that exist for us to get in 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 either some of our existing products, or the, I'll call them the newer wood-based products, into that particular sector.

Great, thanks, guys. You're welcome.

Next question comes from the line of Steve Churchrober. The line is now open.

Thanks.

Good morning, Steve. So it's kind of late in the Q&A, so forgive me if some of these are follow-ons, but starting with the CapEx at Chester and Florine, can you carve out of the 85 to 90 how much is specifically at improving those two assets and 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 in wood. So instead of 55, call it 65. And in Chester, we bought that mill in late 2013. And we've been 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 in the log utilization center, the things we've done to improve the delays in the green end and the new dryer are largely maintenance replacement of obsolete, poor machine centers. So we are expecting labor savings and some better product quality and modest incremental throughput, but that was replacing 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 in fluorine, it's somewhat of a similar case. We put in a very large new dryer that's got 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 hadn't made the improvements in the log yard and in the lays to get the full amount of veneer through to the dryer that we put in. So this project that we have underway that will finish up mid-year of 2020 is really to allow us to get more logs processed efficiently through the front end of the complex and to the lathes. And with that, we'll be able to get the veneer off the lathes and into the new large dryer. And again, that will, the market allows, meaningfully increase our self-sufficiency of veneer going into Alexandria, should we find ourselves in a position where we're back towards a million four or a million five housing starts. And the return on it is 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 at a million three housing starts and for some reason we aren't able to penetrate multifamily and some of the other areas of light 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, but more like the ability to survive and or participate.

Well, again, I think as Mike mentioned, we may be able to sell to other engineered wood producers or plywood producers, but my hope is that we can find outlets in the non-single family arena that will allow us to suck up that veneer as incremental EWP production. And if we can do that, the economics become pretty good. But as Mike said, that's still in the development phase yet to be proven that we can do that in a volume that is meaningful. And obviously we're putting a lot of time and energy into it because we think it's pretty important and it's under our control. But I wouldn't model it into your 2020 numbers, for example.

Got it. And Like many of us, I'm fascinated by this whole CLT explosion, and I see it going up around me here in Oregon. But when you talk about the incremental veneer, 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 where you're going to be a CLT producer.

Well, and this will... I don't want to overstate this, but the U.S. is late to the game. Europe, if you look at Austria and a number of other countries, have been building larger wood structures with timber for a long time. So part of it is the building code has changed here in the U.S. We were, I think, smart enough to say, hey, there's a couple countries in Europe that have 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 it, what channels do they go through, and then let's figure out how we can participate in the U.S. in a way that makes sense for our shareholders. And if you look at a number of the large landlords, Lendlease, for example, there's a huge project that 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 and distribution, we think there's a market opportunity there, and we really want to figure out how we can play that makes sense for our shareholders.

Got it. Thanks, Wayne. 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 to expand your product lines through those facilities and maybe reduce freight? Because I don't think they're that big otherwise.

Yeah, if you look at, I'll take Nashville, for example, because that was one of the first ones we did. They had been selling Boise Cascade EWP 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 in Memphis and Atlanta, targeting the right growth opportunities in 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 into those with a view that we could significantly expand their revenue footprint and, frankly, do more in traditional commodities than what any of those three were doing on their own and get more big bucks than some of the national players into the customer mix.

Are there any other glaring holes? I'm looking at one of your presentations. Is there something where you'd want to be?

Yeah. So the most glaring hole that I always talk to Nick about is I look at, like, Austin, San Antonio. And, again, we service those markets today out of a combination of Houston, Dallas, and occasionally Albuquerque. But if you look at West Texas and given the economic activity, there's an opportunity for us there. Gulf Coast region, there's a couple of spots. And, again, we – in our – investor deck, and we'll put a new one up 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. If you 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, particularly if we're going to do it through acquisition, that we have really good alignment with the key vendors and and that the management team and the culture fits. The last thing we're going to do is buy somebody who's got, in some ways, the wrong set of vendors, and we certainly aren't going to bring anybody on the playing field that doesn't want to behave in a culture consistent with the way we behave.

Okay, thanks, Wayne. Thanks, everyone.

Next question comes from the line of George Staffos. 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 piggybacks a little bit on the prior question, how much of the benefit to earnings do you think is volume-dependent and how much would actually show up, you know, almost irrespective of the single-family start environment if you had a size and total, you know, what kind of pick-up 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 appreciate this answer. I would say without volume, we would get, if you were looking at a 100, yeah, it's maybe 25 bucks out of 100. There's way more leverage on the earnings if we get incremental volume particularly if we can get it through EWP. But again, we think it's important that we do that for cost structure on those mills and market position. And one macro issue that we're paying a bit of attention to is obviously a lot of activity east of the Mississippi from a housing standpoint and general economic activity. And the one thing I would point out on lumber, OSB, and plywood is is as the production capacity in North America migrates to the south, that is largely a truck ship market. And if you think about western Canada, and particularly upper reaches far from the border, almost exclusively a rail market with very long lead times. So we think for the distribution business and our manufacturing footprint, it is increasingly important that we pay attention to the manufacturing costs 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 more of the industry becomes a truck market versus a rail market. And again, that's a long migration of capacity, but we think it's been underway for a number of years and it's likely to continue. So low-cost capacity in the south is really important. to our company.

Understood, Wayne. I'll turn it over. Thanks, and good luck in the quarter. Thank you.

Very no further questions. Presenters, please continue.

Tom, you want to do the closed?

You bet. Happy to do it, Wayne. 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 to commodity pricing by growing EWP 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 goodbye.

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