Boise Cascade, L.L.C.

Good morning. My name is Livia, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to Boise Cascades' third quarter 2019 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll 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. Question will be taken in the order they are received. If you would like to withdraw your 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 future performance, and the company undertakes no duty to update them. Although these statements reflect management 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 discussion of the factors that may cause actual results to differ from the results anticipated, please refer to Boise Cascades' recent filings with the SEC. It is now my pleasure to introduce you to Wayne Wancourt, Executive Vice President, CFO, and Treasurer, Boise Cascades. Mr. Wancourt, you may begin your conference.

Thank you, Olivia. Good morning, everyone. I would like to welcome you to Boise Cascades third quarter 2019 earnings call and business update. Joining me on today's call are Tom Cork, our CEO, Nate Jorgensen, our COO, Mike Brown, head of our wood products operations, and Nick Stokes, head of our building materials distribution operations. Turning to slide two, I would point out the information regarding our forward-looking statements. The appendix of the presentation includes reconciliations from our gap net income to EBITDA and adjusted EBITDA and segment income to segment EBITDA. I will now turn the call over to Tom.

Thanks, Wayne. Good morning, everyone. Thank you for joining us for our earnings call today. I'm on slide three. Our third quarter sales of $1.3 billion were down 5% from third quarter 2018. Our net income was $27.2 million, or 69 cents per share, up from 35 cents per share in the year-ago quarter. Third quarter 2019 results include a $1 million after-tax loss, or 3 cents per share, from a non-cash pension settlement charge. Third quarter 2018 results included $16.7 million of net after-tax losses, or 42 cents per share, from a non-cash pension settlement charge and impairment in sale-related losses. Our operating performance in both businesses was solid, considering the limited demand growth and ongoing weakness in the plywood pricing environment. Consistent with our strategy, the volatility of our earnings has continued to decline as we emphasize growth in distribution and engineered wood products. Our wood products manufacturing business reported segment income of $15.6 million in the third quarter, compared to $13.9 million in the year-ago quarter. Wood products third quarter 2018 results included $11 million of pre-tax charges for asset impairment and sale-related losses. Our building materials distribution business reported segment income of $38.7 million on quarterly sales of $1.1 billion for the third quarter, compared to $23.5 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 will come back to provide our outlook before we take your questions.

Thank you, Tom. I'm on slide four. Wood products sales in the third quarter, including sales to our distribution segment, were $325 million, down 19% from third quarter 2018. Approximately one-third of the decline in sales is due to asset sales or closures in the last 12 months. As Tom mentioned, Wood products reported segment income of $15.6 million in the third quarter compared to $13.9 million in the prior year quarter. Reported EBITDA for the business was $30.8 million, down from the $32.7 million of EBITDA reported in the year-ago quarter. As Tom mentioned earlier, third quarter 2018 results included impairment and asset sale-related losses of $11 million. When excluding the $11 million loss, wood product segment income decreased due to lower plywood prices. Partially offsetting the negative plywood price variance were favorable input costs for oriented strandboard, logs, and lumber. The business also had lower employee-related expenses and lower depreciation and amortization expense than in the year-ago quarter. BMD's sales in the quarter were $1.1 billion, down 1% from third quarter 2018. Sales prices declined 11%, but sales volumes were up 10%. Excluding the impact of the acquisitions made in the last 12 months, the sales decline in BMD would have been approximately 4%. BMD reported segment income of $38.7 million or EBITDA of $43.9 million. This compares to segment income of $23.5 million and EBITDA of $28.3 million in the prior year quarter. The increase in income was driven primarily by a gross margin increase of $30.3 million, resulting from improved gross margins on commodity products and higher sales of general line products compared with third quarter 2018. Gross margins on commodity products in the prior year quarter were negatively impacted by sharply falling prices. The increase in gross margin during third quarter was offset partially by a $13.3 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 $10.7 million in third quarter 2019, compared with negative 18.2 million in third quarter 2018. Third quarter 2019 results included a 1.3 million non-cash pension settlement charge compared with an 11.3 million non-cash pension settlement charge in third quarter 2018. As we move through the balance of this year, our earnings comparisons to 2018 should be made with due consideration of the restructuring activities undertaken in the last year. We have included a summary of last year's items and the earnings impasse in the appendix to the presentation. Turning to slide five, our third quarter sales volumes for laminated veneer lumber were up 4%, while iJoyce were down 2% compared with third quarter 2018. As a reminder, EWP consumption is influenced not only by total housing starts, but also by the mix of single-family and multi-family starts, median single-family home size as well as the home foundation type. Our LVL volume trends continue to track pretty closely with single-family starts, while our I-Joyce volumes are declining modestly. We believe the decline in our I-Joyce sales is due in part to decreases in median home size and an increasing proportion of slab-on-grade new home construction. Both LVL and I-Joyce third quarter pricing was up 1% from the year-ago quarter reflecting pricing actions taken in early 2018 and ongoing management of our customer programs. Turning to slide six, our third quarter plywood sales volume in wood products was 343 million feet compared to 368 million feet in third quarter 2018. The lower volume for plywood sales reflects the sale of the Moncure plywood facility during first quarter 2019. Also, we continue to work to optimize veneer into EWP production and to limit production of plywood where it results in cash losses. The $254 average plywood net sales price in third quarter was down 29% from third quarter 2018. October 2019's plywood pricing was similar to the third quarter average, or about 15% below average levels experienced in the fourth quarter of 2018. Moving to slide seven, BMD's third quarter sales were $1.1 billion, down 1% from third quarter 2018. By product area, BMD's commodity sales decreased 16%, general line product sales increased 18%, and EWP sales increased 2%. The gross margin percentage for BMD in third quarter was 13%, up 270 basis points from the 10.3% reported in third quarter 2018. The gross margin increase resulted from more normalized gross margins on commodity products and higher sales of general line products compared to third quarter 2018. The prior year quarter was negatively impacted by sharply falling commodity wood products prices. As a reminder, general line products and EWP that we service through our branches tend to have higher gross margins, but also higher associated sales and handling costs. BMG's EBITDA margin was 3.8% for the quarter, up from the 2.4% reported in the year-ago quarter. Looking forward, we anticipate that commodity product pricing in the fourth quarter of 2019 will remain low, but will be more stable compared to the volatility experienced in fourth 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 75.8 million during the third quarter. Both businesses meaningfully reduced inventories in response to market conditions and in anticipation of slowing sales activity as we move later into the building season. The statistical information filed as Exhibit 99.2 to our 8K has the receivables, inventory, and accounts table data broken down by segment for those that are interested in more detail. I'm now on slide nine. We finished third quarter with $306 million of cash. Our total available liquidity at September 30 was approximately $672 million, which reflects our cash as well as the availability under our admitted bank line. Our capital spending, excluding acquisitions, is expected to be between $85 and $95 million this year, with a similar spending level anticipated in 2020. We continue to expect our effective book tax rate to be approximately 26% going forward. I will call back over to Tom to discuss the outlook and our recent dividend-related actions.

Thanks, Dwayne. I'm on slide 10. The October consensus for 2019 U.S. housing starts is $1.25 million, which is flat with 2018. The consensus estimate for 2020 implies only modest growth to 1.27 million starts. 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 availability of construction labor continue to influence the pace of activity. We expect limited revenue growth over the next 12 months from an overall increase in product demand so we are sharply focused on growing our distribution revenues organically and through opportunistic acquisitions. In wood products, our focus remains on driving operational improvements and getting additional veneer into higher value, more stably priced engineered wood products. Despite weakness in commodity wood products pricing, we continue to invest in our operations and our people to position both of the businesses for success in the years ahead. I am pleased that even with the tough backdrop, our execution has generated considerable free cash flow this year and built up our cash balance. In light of our operating performance and the balance sheet position, our board supported raising our regular quarterly dividend by 11% to $0.10 per share, as well as paying a supplemental dividend of $1 per share again this year. After payment of the supplemental dividend, we remain well positioned with sufficient cash and reserves to support internal growth initiatives, anticipated working capital uses, as well as smaller opportunistic acquisitions as we move into 2020. Our objective remains to successfully grow our businesses while generating appropriate returns on shareholder capital. We would welcome any questions at this time. Operator, would you please open the lines?

Ladies and gentlemen, as a reminder, to ask a question, you will need to press the star and the one on your touch-tone telephone. To withdraw your question, please press the pound key. Please stand by while we complete the answer. And our first question coming from the line of New York State Post with Bank of America. Your line is open.

Hi, everyone. Good morning. Thanks for the details, and congratulations on the performance. The first question I had, and I realize it's not necessarily in the the current outlook in terms of how you think starts and construction and the economy will develop necessarily. But given what you've been doing with working capital, is there a point where demand, let's say it improved much more quickly than you would like, be a high-class problem, would stress your operations, stress your inventory and the chain? And if so, where would that be?

So George, this is Wayne. If you look at our $306 million cash balance that we had in September, a big portion of that is a liquidation of working capital. So one of the reasons we and our board took a reasonably conservative position on the supplemental dividend is our assumption is that as we move into the spring building season in 2020, we are likely to see a rebuilding of inventory balances. And given the capacity withdrawals that have occurred both in lumber and in OSB, we think there's a pretty decent chance that we're going to have a different supply-demand balance as we get into the spring building season. So we're allowing cash on the balance sheet to deal with what we assume will be a rebound in required working capital that could be as much as $50 to $70 million next spring.

Okay. Thanks for that, Wayne. And then the other question that I had, are you seeing – any impact on your business, recognizing it's later in the year and seasonally not necessarily when you'd see something tension within your business related to the supply chain, but are you seeing any effect from some of the other curtailments that have occurred in the panel markets flowing back into anything in terms of plywood demand, plywood demand expectations, and the like?

George, we've seen a modest improvement. I would tell you I don't think that there's a normal level of inventories yet back into the supply chain, but it's getting closer to a normal balance, and I would tell you both in plywood and I think from what I've read in OSB, I think the order files are back out to two to three weeks, which is a more normal process. So I think some of the ready availability, short lead times that people were experiencing earlier this year allowed people to run down inventories with pretty high confidence that they weren't going to get caught on price and weren't going to have a challenge to get material. And I think with the announcements that have come in the last few weeks, that confidence level around lead times has started to diminish. And I think with order files out at two to three weeks, you're seeing a little bit of restocking in the channel and more normal supply-demand favors. So I do think we've stabilized on price largely in response to the supply withdrawals that have been announced.

Okay. Thanks, Wayne. I'll turn it over there and I'll come back. Thank you. Thank you.

Our next question coming from the line of Mark Wall with BMO Capital Markets.

Good morning, Tom. Good morning, Wayne.

Good morning, Mark. Hi, Mark.

Tom, I wondered, well, first, I want to say to Nick Stokes, I hope you're going to buy your guys sandwiches today because it's another great quarter in distribution.

Thanks, Mark. I may even buy him a beer, too.

Yeah, it would go good with a sandwich. I wanted to ask you guys about the numbers we've been seeing out of the home builders and the commentary we've been seeing out of the home builders have really improved over the last four to six months. What are you seeing in terms of kind of pull from the home building sector right now?

Hey, Mark. It's Nate Jorgensen. I think the mood and tone from the home builders, especially probably some of the production builders, continues to improve. I think as they finish off 2019, I think they've been consistent that they expect to have a good finish of the year, weather permitting, and I think their expectations as they head into 2020 continue to improve. there's no question they continue to be focused on the entry-level part of the market. And they continue, I think, to match their services and product mix around that entry-level market as compared to perhaps the move-up luxury side of things. So I would say the tone as we finish this year, certainly as compared to this time last year, is improved. But I think in terms of expectations for 2020, we'll continue to look for that entry-level home. We'll continue to look for probably a smaller footprint as a result. But, again, the tone remains favorable for the larger builders.

Yeah, Mark, this is Tom. I would add that, you know, if you think about, you know, we're looking at a relatively small increase in starts next year that I think will be pretty well offset from a demand perspective by a decline in house size. And so, you know, as we look at overall demand and factor those two things together, it looks pretty flat.

Okay. Tom, for a second question, I wondered if you could just kind of update us on your thoughts around growing the distribution business. What I think I've heard in the past is sort of three different kind of strategies. One is the footprint fill-in, which you've been doing. Another one is kind of extending kind of the product lines and individual DCs. And then the third would be kind of potential acquisition that would put you in some new markets. So maybe you can, A, kind of confirm that that's still kind of those are the three buckets, and then just give us a sense of how you're thinking about each of those.

Sure. So, you know, I really don't think the buckets have changed. I think the speech has been pretty consistent. In some respects, you do it as well as we do, Mark. Sorry. I'll be good. But, you know, I think we continue to make progress in each of those areas. We – You know, there's really a variety of aspects going on. I think just through regular business planning, we continually are focused on existing products to new customers and new products to existing customers. A lot of work in the division right now on expanding service levels into markets that we serve, but maybe not as high a level just simply due to geographic removal from the location. And then we continue to look at infill acquisition opportunities. And, frankly, I think we've stepped up our activities a bit on adjacent businesses as well, both in terms of organic growth and continuing to look at acquisitions. Wayne or Nick, anything you would add to that? Yeah.

All right. The final one for me, then, is just you've had a new competitor, I think, just start up in the last several weeks down in the southeast, you know, How do you think about the potential impact of that as we move into 2020? I suspect they've been seeding the market already, so it's probably not like starting from zero.

Yeah, hi, Mark. This is Mike Brown. Yeah, you're right. The Rose Lake facility has commenced their startup. So I hope you can hear me. I'm a bit of a cold. Yep, I'm fine. Okay. Okay. So, yes, we've certainly seen some activity in the marketplace. They're starting to find traction in a number of areas, but they have some existing customers that I believe they're going to focus on first. If anything, because of their business model, we would expect to see some pricing pressure moving into next year. We haven't really seen any major impact of that yet, just some localised discussions more than anything else that we're aware of. But moving into 2020, as they ramp up the facility, I'm sure that there will be more activity on that front.

Okay, that's helpful. I'll turn it over.

Thanks, Mark.

Our next question is coming from the line of Chip Dillon with Vertical Research Partners.

Yeah, let us help him. Hi, Chip. Hi, guys. Hi. How are you? Good. Great. So my first question is, as we look a little bit about OSB, you know, that has been a tailwind this year, and it looks like finally it's moving higher. But, you know, usually we look on the benchmark north central price. This has barely budged in the past couple of months, whereas, you know, we've seen very strong increases in other regions. How should we think about kind of the regional mix that affects you more? I would assume, for example, the southeast price is moving higher. matter a lot more to you than the benchmark most people are tracking?

This is Wayne. I think for the input cost for OSB, it's probably going to be tracking more closely with North Central. We tend to use Aspen as our web. In terms of the overall impact on the plywood markets, there's probably more pressure coming from excess OSB capacity in the south-southeast We've seen some pricing improvement in the West, and there's been more differential on West Coast pricing versus the South than has been there traditionally, and that's really gapped out with the LSB guys. Our thought is with the closures announced by Georgia Pacific and the curtailment that Norboard announced that we'll see a little better balance in panels in the South going forward, but that's probably the pressure on plywood price. As a reminder, we consume about five times our students say we sell about five times as much plywood as we consume OSB. So the pressure on plywood prices is more important than the benefit we get from having cheap OSB on the web by orders of magnitude.

Okay, that is very helpful. The other thing I want to understand a little bit better was about your organic volume growth in building material distributions. I mean, you did know 10% volume growth, and I think – M&A was around three percentage points. So clearly that's well above where the market is. Can you talk a little bit about what drove this and, you know, what strategies you're feeding? I think you mentioned before bringing, you know, new products to existing customers, for example, if you can elaborate on that. And how should we think about, you know, potentially outperforming, you know, housing starts into 2020 on volumes?

Good morning. This is Nick Stokes. Clearly, you can see from the statistical information that most of the or a bigger chunk of the share growth quarter to quarter came in the general line business. Modest increases in EWP and some sales declines on a dollar basis for commodities. Volumes of commodities actually were close to flat. And what you saw in the shift to mix was the price deflation of some of those things in the neighborhood of 25%. So as we think about our strategy in terms of adding to the product lines and outperforming the market, if you will, we continue to have a strategy of being closely aligned with manufacturers who have leading brands. And what we offer those guys is a strong and exceptional service platform, both in terms of logistics as well as sales support. We have the folks to go out and drive those product growths. And certainly, to Wayne's point earlier, the balance sheet to invest in those inventories. And I think what we aspire to do and what you saw a little bit in the third quarter was a little bit of share gain on some of those products, and we'll continue to focus on those kind of activities.

Great. Thank you very much.

Thank you.

Our next question coming from the line of Steve Jerkofer. Thanks.

Good morning, everyone. Good morning. So the restructuring of your manufacturing footprint has clearly paid dividends, and I'm just wondering, you know, do you feel that that footprint is currently what you need for the foreseeable future?

Steve, this is Wayne. I hope not. We have a very rudimentary kind of small operation today that's looking at the commercial side of the business. We've made some inroads into multifamily and into light commercial, and the building codes recently changed to allow up to 18-story wood construction. So over time, we would love to find a way to get more veneer into engineered wood and engineered wood into additional end uses that aren't directly single-family housing related. Again, I think that's going to be a longer cycle impact, but that's where we're spending a lot of time, both on the innovation front and trying to understand the market dynamics where it's more of a specified product rather than more of a commodity sell, if you will. And again, I think we will look at modifying our manufacturing footprint as those opportunities develop, but relative to the The changes we made in 2018, we think most of the facilities that didn't align with what we wanted to do strategically, we took care of in 2018. And we're happy with the veneer operations today. And with any luck, we will be able to continue to migrate into EWP. And if plywood structurally is in slow decline, repurpose that veneer into higher-value products that are more stable and, frankly, that are more specified into the end-used and have a service component, not just a commodity cell.

So maybe you can elaborate on how you might get into commercial Wayne. Like would that be with open web trusses or some kind of hybrid truss, which is part metal, part wood? I mean, and, you know, CLT and 18-story wood structures is exciting, but I don't necessarily see you being first movers there, but maybe I'm wrong.

Well, I'm not sure we'd be a first mover into CLT. I mean, and I'm going to take the liberty of being the finance guy to speak for Mike. I think the place where we've probably got an opportunity is dimensionally, we use large presses to make our LVL. So if you think of large structural elements in a tall wood building, for example, perhaps, and again, I don't want to put too much emphasis on this, perhaps we could do a three foot by three foot by 40 foot column made out of LVL that would make an appropriate support for an elevator shaft in a tall wood building. And if you were using a continuous press and making LVL, that would be exceedingly difficult to do. So part of what we're trying to do is look at where we might be able to take product innovation given our footprint in manufacturing, particularly LVL and the beam product. Are there other applications that might be appropriate in the commercial structures? And again, I think a lot of this may start in hotels, restaurants, low-rise, but as the tall wood buildings – become more prominent in North America. Obviously, if we can play there, we think that's an additional outlook, but we've got product development work we're going to need to do to get there.

Steve, this is Tom. I would add that we're still, to some degree, at the beginning of this process, and part of it's product related, but part of it's market channel related, and so there's just a lot of groundwork that we're going to have to go through that goes all the way literally from the mills through to the general contractor to assess where our opportunities are relative to the strengths that we have internally. And so we're very much in the middle of that process.

And the good news is, while it's a small effort at this point, it isn't the first time we did this. I mean, when we got into the engineered wood business, we spent a lot of time working on software and figuring out the service platform. And for us today, the tie between manufacturing and distribution is exceedingly strong in the software and the technical service in the field. is an important part of our value proposition in the market. And I would envision that if we're able to successfully do this in commercial, it will probably be a similar long development cycle, but could add substantial value to the company over time.

Yeah, those tall wood structures, and there is a number of them in Portland, are wonderful. I love them. Okay, and then I guess I'm thinking like a hedge fund guy, but it seemed kind of granular to say we could fund acquisitions in the next six to nine months. So I'm just wondering, You know, are there things in the pipeline?

Okay, so Wayne was responsible for that wording, and the reason the next six to nine months is we've had a number of conversations here that we expect to use a fair amount of the cash for working capital in the spring. And again, we think both businesses are performing well, so we would expect over the next nine months to generate cash, but... That was basically to put a time horizon that if we are wrong about the pace of acquisitions and the use of cash, that's a signal that we will revisit the topic with our board on an ongoing basis. And if it turns out we get to the end of second quarter and we have excess cash that isn't sufficient from a return on capital standpoint, we will re-look at it. And, again, if we don't need the cash in the business and if we don't see – inorganic opportunities, hopefully the fact that we've done two supplemental dividends in a row sends a message that we're going to try to be efficient on the cash that we retain. And if it turns out we've got more cash than we need to grow both businesses, we'll figure out a way to return it.

Yeah. Having said that, Steve, there's a huge amount of work going on here in both businesses on growth. And we're going to be responsible and thoughtful about how we deploy capital. But we certainly have You know, there was magic, that's the wrong word, but there was thought about what we distributed in the supplemental dividend and what we kept. And we continue to work hard on growth. And if we can make some of the things come to fruition, we would prefer everything else equal if we have good projects to deploy the capital internally.

Gotcha. Thanks for elaborating. And then last question, I promise. To try and paraphrase Wayne, I think this year you said that if we enjoyed any commodity price strength, it would be supply-driven. And I'm just wondering if you feel that remains the case for 2020.

Yeah, again, frankly, I was a little bit surprised that we didn't see more improvement in late September, October with some of the capacity withdrawals. But I think the actions that have been taken, particularly in Western Canada on lumber and and on OSB and the two recent announcements on OSB in the south, probably establish a better supply-demand balance going into the spring of 2020 than we've had throughout 2019. And I guess I would leave it there. But I think a number of people have looked at the fact that we're probably unlikely to go back to 1.4 to 1.5 million housing starts anytime soon, and I think this change in geographic location on the mix of homes and the type of home being built, I think people are being more realistic about the amount of demand that's likely to be out there. And again, I feel better about the supply side, but I do think the supply side will continue to be the determining factor. I think the demand side is actually at this point reasonably predictable short of some major economic shock. I think the demand side has been pretty stable.

Thank you for taking my question.

Thanks, Steve.

Our next question coming from the line of Ruben Garner with Seaport Global Securities. Your line is open.

Thank you. Good morning, everybody. Good morning, everyone. So maybe on the distribution margin front, another strong quarter there, EBITDA margins in the high threes or mid to high threes the last couple quarters. Can you talk about kind of is there anything – one time or any specific drivers to that or how should we think about what that margin profile of that business looks like on a go-for basis? Is this kind of a new baseline or is there anything going on that makes this kind of a near-term performance?

Ruben, this is Nick Soaks. I would tell you that the third quarter was really a bit of a... The dynamics around our margins in the third quarter were a bit different, and it was kind of a numerator and denominator issue. If you think about the mix of products, the shift from commodities to more of a general line strong mix, that drove the gross margin number, and certainly the commodity price deflation affect that mix. And quite frankly, we had a bit of a tailwind on the lumber side in the third quarter, and as we've articulated in the past, you know, it's not so much about the absolute price for the distribution business as it is the trajectory of change. And we had a bit of a tailwind on lumber, not so much on panels. In terms of future guidance, I'll turn this back over to Wayne and let him talk about that. Yeah, I think Nick hit it on the mixed issues.

And we had it in the script, the comment that we tend to have higher gross margins and higher op-ex on the general line and EWP category. The other portion is if you think about it from a return on capital, as a general rule, the general line products turn more slowly than the pure commodities. And we sell less of those products on a direct basis. So the velocity is lower. And frankly, you need a better net margin. to get the same return on capital that you'd have on some of the commodity things that have a higher inventory turn and higher velocity. So, you know, to the extent we're successful in growing in adjacencies that are heavy to general line products, I would expect that to cause the gross margin percentage to move up. I would expect the OpEx percentage to move up as well. And, frankly, over time, we would need a slightly higher EBITDA margin to support the return on capitals that we're accustomed to.

Got it. That was very helpful. And that kind of actually leads into my second question. So were there any – well, I guess the mix shift that you saw, how much of it was just because commodity prices are down versus maybe are you seeing outsized volume and or price growth in any of your non-commodity products at distribution? Yeah.

I think both Ruben contributed. I think the deflation on commodities is a major factor, but as Nick alluded to, we've got very strong channel partners on the vendor side and in a couple cases picked up some additional distribution sites with some of our existing vendors and enjoyed sales growth as a result of those products coming into more branches. And I think his team continues to do a really good job of lateralizing new products where it makes sense. And as I said, they've had a couple supplier conversions that provided considerable incremental revenues in the third quarter, and they continue to work on those opportunities with a number of their key vendors.

Okay. And then I'm going to sneak one more in. Anything to think about as we move into 2020 from a inflation or deflation perspective outside of the commodity wood prices, whether it's freight, labor, other products, any other sources of pressure and or help as we look into next year? Thanks, guys.

I wouldn't really call anything out. I think you probably touched on the one that you notably excluded. I think if there's price inflation, probably the meaningful piece will likely come in commodities and And for our wood business, the question is if OSB moves up, we may see an increase in our I-joist input cost. And it may or may not move up sufficiently to provide any lift to plywood pricing. On the other cost, I think we're doing okay on handlers and drivers. That's an issue in the economy with the economy being tight where we've seen some wage inflation. But the rest of our input costs, I don't really see anything meaningful in 2020 in terms of change on log costs or other elements at this point.

From a price perspective, I think the only place, you know, I don't see, as we talked earlier, I don't see how many factors are going to put a lot of push onto pricing upwards on commodity prices. On the other hand, people are operating at cash costs at this point, so I don't see a lot of downward pressure there. If we were worried about anything on the price side, it'd be the additional capacity coming up in the EWP side in the East. Understood. Thank you, guys.

Our next question coming from the line of Brian McGuire with Goldman Sachs. Your line is open.

Hey, good morning, guys. Good morning, Brian. Good morning. I just wanted to come back to the strong volumes and distribution. You mentioned some market share gains there. Just wondering, is that coming more from signing up new products to put in the system and new relationships with manufacturers, or is that just more existing products outselling competitors in the market?

Brian, this is Nick. It's probably a bit of all three. The other thing that you didn't articulate or ask about was if you think about the acquisitions that we've made over the last 18 months, one of the benefits that we anticipated and one of the benefits that we're getting is a broader mix of products into those newer locations by leveraging the existing relationships that BMD has across the country. That's a piece of it. Certainly the incremental growth of on some of the product lines to wayne's point has been a little conversion and it reflects the strategy of continuing to try to broaden the product mix both new and different as well as lateralizing good stuff from point a to point b

Okay, great. And Wayne, I think you mentioned how OSB and plywood inventories maybe are not down to normal levels, but maybe are getting there. The order books have certainly gone back to normal. On lumber, Nick, would you say the same in that channel that we're maybe not quite back to normal, but on our way getting close to there?

Yeah, I think that's fair, Brian. And Wayne kind of hit on the elements associated with that. You've got a seasonal impact, which I'm sure Many of my customers and many of my competitors are doing the same thing we're doing, is thinking about anticipated volumes through the winter and rationalizing those inventories. And I think the other part that, again, Wayne mentioned is this expectation in the marketplace that lead times are a bit shorter, supplies are more readily available. Certainly there's not a scarcity of product out there, but it's in more balance. You know, the toggle switch on this will be what happens with volumes in the winter because people can react pretty quick about getting some inventory in the system if winter is less severe and or demand spikes unexpectedly.

Okay, great. And, Wayne, I think in response to George's question, you said that in the springtime you might need, I think you said 50 to 60 million of cash for working capital. Are you talking about just the normal seasonal build in working capital, or are you sort of implying that for 2020, you know, working capital could be a use of cash in that range for the full year?

I think we could see a use of cash for the full year. I don't know that it will be the 50 to 70, because again, some of it will build in second, third quarter, and even if we have higher business activity, we'll release a lot of it in fourth quarter. But just as a reminder, we pay out a lot of our incentive compensation for employees. We pay out vendor rebate payments, and we have normal seasonal working capital build related to inventories. And I think, although we'll see we may see some price inflation on commodities in the spring of 2020. And if you combine all three of those, the 50s is, in my mind, more than we would normally expect. And again, I think part of that is we're coming in to the end of this year with particularly current levels. We're below where we would normally like to be on LVL inventories and iJoyce inventories. We're light in BMD relative to where we would normally be. And we've got a fair amount of deflation in the commodities. And, again, whether or not there's price escalation in OSB remains to be seen. But I think just on a pure volume basis, we're probably lighter through our system in both manufacturing and in BMD than we would normally be. And we'll see how much of that gets replaced before December 31st. But as we calibrated our supplemental dividend, we calibrated within – with the thought of keeping 50 to 60 million of dry powder more than normal to accommodate incremental working capital.

That makes sense. Last one from me. Can you just remind me the timing on the Florian project and what impact to EBITDA you think it could have in maybe the first year or the second year of its operation?

Yes, sure. This is Mike. The actual project has been ongoing now for almost 12 months and it has until about third quarter of next year to be completed. We anticipate there will be a drain on working capital as we pay our vendors and what have you. As it relates to the operations per se, there has been a little bit of an impact on the production of veneer and subsequent cost impacts. It's not a major impact on the facility itself because we're trying to work around essentially production or lack of production of veneer. So on a volumetric basis, we may be down five-odd percent in total volume production next year at fluorine, but not a major impact.

And the cost savings anticipated from it? Any ballpark on that?

Yeah, really, while this project may bring some cost savings, that is really not the way that this project was justified. That facility's been there now for 50-odd years, and the equipment that we're replacing was at the end, well past actually the end of its useful life. So if we get some modest improvement in cost structure, that's likely to not occur next year. It would be in the following year in 2021. Got it. Okay.

The project at Thorian is really around conditioning the logs and processing the logs to prepare them for the lathe and creating veneers. So it's the Front end process at the mill, we have very good drying capabilities of fluorine that we put in a couple of years ago. But there's a limit on how much veneer we can get through the mill. So the log utilization center, as Mike said, really in 2021, will give us the flexibility of producing more internal veneer and having it available to support the engineered wood operation at Alexandria, Louisiana.

Okay, I appreciate it. Thanks.

We have a follow-up question from George Davis from Bank of America. Your line is open.

Thanks very much. Hi, guys. Just a few nits and nats, so to speak, on the questions. Can you talk about what in particular in general line was up 18% in the quarter, what some of the bigger drivers were there? You talked about working capital. Could you talk at all about what you imagine cash taxes might look like directionally or how we might try to model that and add a couple of follow-ons after that.

George, this is Nick. The growth in general line is really kind of scattered among several. I would tell you that maybe there's some gains in some pre-finished trim and related products. There's some gains in siding, and there's some gains in decking. But it wasn't one thing. It was a little bit of everything. Okay.

And on the pre-finished and the siding, was that new product that you were bringing into the system or that was existing product that was just, you know, gaining more share of the market or growing more quickly? Is there a way to tip the scales one way or another on that?

Well, we have a mix of siding products throughout the systems with many manufacturers and In a couple cases, we were able to convert a few locations to a new brand, and that had a relatively meaningful impact. Okay.

It was an existing brand we distributed that elected to have us distribute in additional branches. And, again, because there was an existing footprint that they had in the market, we were able to step into those volumes reasonably quickly because, again, we had – a good service reputation with them in other branches. I think they had confidence in our ability to execute and confidence in our balance sheet. So we were able to quickly get to a run rate and support their activities. And, by the way, we've seen that second, third quarter. It's been ongoing for a couple of years, and we've got a couple in the works. I think in the three buckets that somebody mentioned earlier in terms of footprint, existing product lines and adjacencies. We have a couple of vendors that Nick works with that have clearly come in in the last 90 to 120 days and said, we've got more we would like to do with you if you're prepared to take it on. And I think we've been really good about supporting Nick's real estate footprint, headcount, and other things so that we can ramp the organic growth. And we've got the balance sheet to do it. And I think in a number of cases, we've got vendors that have seen success in a small number of our branches and would like to lateralize across our footprint in more places. Again, in the siting arena, there was a sharp example of that, but that's really what Nick's team continues to be focused on.

Understood. I'll leave the siting and journal line question to the side, but on taxes payable and cash taxes for 2020, do you have any kind of directional view or things we should consider as we're trying to model that?

Yeah, I would probably model in the high teens to 20 on cash taxes and 26% per book.

Okay. Last couple quick ones from me. Any comment at all in terms of how residuals were in terms of a swing factor year on year or in the core? I imagine it wasn't that big, but just sort of checking the box there. And then, you know, in terms of value return to the shareholder, Again, congratulations on the dividend. In the past, you talked about buyback. Where would you say buyback is in terms of your pecking order? My guess would be it's not that high relative to dividends, only because of the liquidity factor you have with the common stock. I wouldn't have expected a buyback, but just if you could update us on your views there. Thanks, guys.

Good luck in the quarter. If you're talking about the residuals as it relates to wood residuals?

Yes, correct.

Okay. So, yes, we have had a negative impact year over year or year to date, and it was much more than any of us, certainly I predicted. So it was verging on about $5 million, actually. Year on year?

Yeah. Okay.

Year to date, not in the quarter. Okay, fine. And on the buybacks, I would... To echo Cork's earlier comment, we would prefer not to give anything back other than the regular dividend. If we've got organic opportunities, right acquisition opportunities, we're going to try hard not to give anything back. And our philosophy on buybacks, and again, these are decisions that our board reviews, so this is Lane's commentary. I'm not going to tell you that I fully represent our board at all times. When we do buybacks, we view it as we are doing it on behalf of the people that are staying in. And so we try to have some view of what we think the future holds and want to execute buybacks where we have a high degree of confidence that it's going to benefit the people that are still in. And your point about liquidity and the shares, trading levels and other things, somewhat enters into that calculus. But I would tell you the bigger part of it is how much confidence do we have that we're smarter than the market and we can buy at a discount on behalf of the people that are still in. And again, we think both share repurchases and the supplemental dividend mechanism have a place in our business because acquisition opportunities and growth opportunities can be lumpy. And as we've seen in the last 18 months, commodity prices can be volatile. And so We would prefer to maintain the flexibility to deploy capital to where it makes the most sense for our shareholders. And we are not, at least some of us are not in the camp that says we ought to do the same amount dollar-wise on share repurchases regardless of price.

Yeah, no, Wayne, I understand. And obviously with the stock, the way it's been performing, I wouldn't have expected buyback here. I just wanted to kind of a reminder on how you view it. And obviously that was very helpful. Thank you, guys.

Now, the only reason I clarified is I have read some other – people's background that view their share repurchase program as a tax-efficient way to pay a regular dividend, and that is not how we look at share repurchases.

Understood. Thank you, guys.

Thank you. Libby, I think we're getting close to time. Do you have any final one question maybe in the queue? Otherwise, we'll wrap up.

Yes, sir. I'm sorry. I have one more question coming from the line of Mr. Mark Wilde from VMO Capital Market.

Wayne, I have two follow-ons. The first one is just the impact of the lower West Coast log prices on the third quarter and how we might think about that going into the fourth quarter and then next year because I know sometimes there's kind of a lag in here. And then I had one other question.

So, Mark, Certainly, log prices are down year over year, but they're sort of flat quarter to quarter this year, more or less flat anyway. So if you're just looking from second quarter to third quarter, I've used in the greater Pacific Northwest, the numbers are more or less flat. Year over year, they're down quite considerably for sure. And across, again, the Pacific Northwest in general, it's about 10%, but we have different regions there, of course. Going into next year, we've already started to see on the coastal side of Oregon, where we have our operations, that log prices have started to move up a little bit in the last, I'll say, 30 to 60 days, but not significantly yet. I anticipate in 2020, log prices will be up somewhat, but not to a major extent like they were a couple years back.

Okay. The last question I had, was I wondered if one of you could walk us through briefly this case on Brazilian plywood and the grading standards.

I can try and give you the best insight I have, which is only one view, I guess, Mark. The way I understand it is that a group of plywood producers in the United States have formed a consortium, if you will, and have lodged a suit essentially against the certification agencies that are operating within Brazil claiming that, I think there are two claims are under one of the acts which is essentially I think around the what I would call false advertising and the other claim, I just don't recall what it is right at the moment. As far as I'm aware, I heard a little bit of news in the last couple of days that it's sort of in an abeyance, that there has been some additional movement from the defendants basically trying to have the case thrown out, but there has been no decision by the court at this point in time.

And Mark, I would throw in, you know, the The issue revolves around the PS1 standard. And, you know, the agencies involved are longstanding players. They are, in fact, audited by yet a third party. And, you know, we very much rely on the grading agencies to evaluate these properties of these products. And until we see something to the contrary, that's what we continue to intend to rely on.

Okay. All right. I take it you are not involved in the action then? No. Okay. All right. Sounds good. Good luck in the fourth quarter as we look at the next year.

Thanks, Mark. Leah, this is Wayne. We're going to wrap up. Before we do, I would just like to acknowledge one of my colleagues, Adele Peppo, who has assisted me for many, many years on our investor relations activity and is the executive assistant for Tom and I and will be retiring. So I'm reasonably confident Adele is listening in on this call and has been a big part of our earnings release process, our webcast, and helping me on roadshows and investor-related activities. We do have an internal person, Connie Whitmarsh, that's going to come in behind Adele. But I would just like to publicly acknowledge and thank Adele for all of the years that she's made the IR function work reasonably smoothly. So, Adele, if you're listening, and I'm sure you are, thank you.

Yes. Thank you, Wayne. Ditto for me on his comments. In closing, I'd like to say I'm just really pleased with our third quarter results, given the underlying weakness in commodity wood pricing and relatively flat market demand. The teams in distribution and manufacturing performed well in a really tough environment. I'm equally pleased where we are positioned from a people, balance sheet, and business plan perspective to drive continued growth and improvement going forward. Thank you for being on the call today, and I hope everyone has a great holiday season. Goodbye.