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Boise Cascade Co
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Good morning. My name is Bruce, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Boise Cascade First Quarter 2018 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions]
Before we begin, I remind you that this call may contain forward-looking statements about the company's future business prospects and anticipated financial performance. These statements are not guarantees of future performance, and the company undertakes no duty to update them. Although these statements reflect management's expectations today, they are subject to a number of business risks and uncertainties. Actual results may differ materially from those expressed or implied in this call. For a discussion of the factors that may cause actual results to differ from the results anticipated, please refer to Boise Cascade's recent filings with the SEC.
It is now my pleasure to introduce you to Wayne Rancourt, Executive Vice President, CFO and Treasurer of Boise Cascade. Mr. Rancourt, you may begin your conference.
Thank you, Bruce. Good morning, everyone. I would like to welcome you to Boise Cascade's First Quarter 2018 Earnings Call and Business Update. Joining me on today's call are Tom Corrick, our CEO; Dan Hutchinson, Head of our Wood Products Operations; and Nick Stokes, Head of our Building Materials Distribution Operations.
Turning to Slide 2, I would point out the information regarding our forward-looking statements. The appendix includes reconciliations from our GAAP net income to EBITDA and adjusted EBITDA.
Now I would like to turn the call over to Tom Corrick.
Thanks, Wayne. Good morning, everyone. Thank you for joining us for our earnings call today. I am on Slide 3. Our first quarter sales of $1.2 billion were up 21% from the first quarter of 2014. Our net income was $37.1 million or $0.94 per share, up substantially from the year ago quarter. The first quarter results reflect its stronger performances in both businesses.
Our Wood Products Manufacturing Business reported much stronger segment income of $26.1 million in the first quarter when compared to $7.4 million in the year ago quarter. Wood products pricing improved on plywood, EWP and lumber compared to last year’s first quarter with the benefit of the higher pricing, partially offset by higher log and OSP input costs.
Our Building Materials Distribution business reported an outstanding first quarter with segment income of $32.4 million on quarterly sales of $992 million. BMD executed well in the quarter by growing volumes and taking advantage of tailwinds and commodity EWP and general line pricing.
Wayne will walk you through the financial results in more detail, and then I will come back with a few more comments on the outlook before we take your questions.
Thank you, Tom. I am on Slide 4. Wood Products sales in the first quarter, including sales to our distribution segment, were $398 million, up 22% from first quarter 2017. As Tom motioned, Wood Products reported segment income of $26.1 million in the first quarter. Reported EBITDA for the business was $43.7 million, almost double the $22.5 million of EBITDA reported in the year ago quarter. The increase in EBITDA was due primarily to higher sales prices of plywood, EWP and lumber, offset partially by higher log costs in the specific northwest and OSB costs used in the manufacture of I-joist.
BMD’s sales in the quarter were $992 million, up 22% from first quarter 2017. Sales prices and sales volumes increased 14% and 8%, respectively. BMD reported segment income of $32.4 million or EBITDA of $36.6 million. This compares to segment income of $20 million and EBITDA of $23.7 million in the prior year quarter. The improvement in income was driven by higher gross profit dollars resulting from higher sales as well as positive operating expense leverage. The amounts for unallocated corporate costs and other items impacting our reported adjusted EBITDA can be found in the tables of our earnings release. The net of those items was negative $6.8 million in the fourth quarter 2018 compared with negative $5.8 million in the first quarter of 2017.
Turning to Slide 5. Our first quarter sales volumes for LVL and I-joist were up 6% and 2% respectively, compared with first quarter 2017. Pricing in first quarter for LVL and I-joist was up 4% and 6% from the year ago quarter. We expect to continue to see favorable pricing comparisons to 2017 for EWP as we move through the rest of this year.
Turning to Slide 6. Our first quarter plywood sales volume and wood products was $360 million feet, up 7% from first quarter 2017. While we directed a significant amount of our internally produced veneer for EWP production in the quarter, our veneer and plywood mills operated well during the quarter, allowing us to take advantage of unusually strong plywood pricing. The $356 average net sales price in first quarter was up 26% from first quarter 2017 pricing for plywood.
Plywood pricing in the first quarter frankly was much stronger than we expected. Pricing and demand for plywood has remained strong early in the second quarter. However, we do expect plywood pricing to moderate as new industry capacity and oriented strand board comes online later this year and the transportation constraints experienced in a number of regions in first quarter in Canada and the U.S. are addressed. Changes in the volume of plywood imports from Brazil have not had a meaningful impact on the supply/demand balance in the first few months of 2018.
Moving to Slide 7. BMD's first quarter sales were $992 million, up 22% from first quarter 2017. By product area, BMD’s sales of commodity products increased 29%. General line products increased 14%, and EWP increased 16%.
The gross margin percentage for BMD in the first quarter was 11.8%, up 20 basis points from the 11.6% reported in the first quarter 2017. BMD's EBITDA margin was 3.7% for the quarter, up 2.9% which was reported in the year-ago quarter. Sales volume growth and expense leverage was once again a meaningful part of BMD’s earnings improvement this quarter.
On Slide 8, we have set out the key elements of our working capital. The company net working capital, excluding cash, income tax items and accrued interest, increased to $107.6 million during the first quarter, representing a significant seasonal use of cash. The seasonal increase in accounts receivable and inventories was not fully offset by the increase in accounts payable. As is normally the case, we also use cash to pay out incentive compensation and customer rebates accruals during the quarter, reducing accrued liabilities.
As a reminder, this statistical information filed as Exhibit 99.2 to our 8-K has receivables, inventory and accounts payable data broken down by segments for those that are interested in more detail.
I'm now on Slide 9. We finished first quarter with the $134.7 million of cash. Our total available liquidity at March 31 was approximately $530 million, which reflects our cash and our availability under our bank lines. We are currently below our stated leverage target of 2.5 times gross debt-to-EBITDA.
Each quarter, we review our business outlook as well as acquisition opportunities and other uses for our cash with our board. Capital allocation to create shareholder value remains a strong focus for management and the board. We did close our acquisition of Lumberman’s Wholesale Distributors in Nashville during the last week of April, and executing on similar opportunity remains a high priority for the company.
Our capital spending, excluding the acquisitions, is expected to be between $75 million and $85 million this year, and we do not anticipate major changes in our spending as a result of the recent tax legislation changes.
Our booked tax rate was lower than we expected in the first quarter as a result of share price appreciation, creating a higher tax deduction for equity incentives divested in the first quarter. We continue to expect our effective book rate to normally be around 25%. Our cash tax rate for 2018 should be around 28%.
And lastly, I’d like to make a discretionary attention plan contribution in the third quarter prior to finalizing our 2017 federal tax return. We are considering a modest pension contribution to take advantage of the 35% deduction right in effect for 2017, but no final discussion has been made.
One more item of note. We completed a pension risk plans for with prudential insurance late in April for approximately one-third of our pension obligations. We transferred $151.89 million of pension assets to prudential, and they will assume ongoing responsibility for administration and benefit payments for a portion of our retirees that are already in payouts status. They will take over those benefit payments starting July 1. We will record a $12 million non-cash pension settlement charge in the second quarter as a result of the transaction. Other than the one-time settlement charge, the transaction is not expected to result in material change in our booked pension expense going forward.
Tom, I will turn it back over to you to wrap up.
Thank you, Wayne. The April consensus estimate for 2018 U.S. housing starts is 1.29 million, up from 1.2 million in 2017. While many builders are facing continued challenges on labor availability, building block constraints and cost-driven margin pressures, the demand for new housing remains very encouraging as providing support for our key product markets. We continue to believe that demographics in the U.S. will support an eventual return to normalized housing starts of 1.4 million to 1.5 million.
I remain encouraged by the current market environment. Importantly, we also have a number of variance within our control in Wood Products and BMD to continue to drive revenue and earnings growth. Our pricing efforts on EWP are gaining traction, and we believe the increases will be supported by the growth in home construction activity. Wood Products is getting a higher proportion of its internally produced veneer into engineered wood products as demand improves, which captures more system margin and allows us to be more flexible in responding to changes in the plywood market.
We are seeing measurable results from our operational and reliability improvements in products, which are just as important as our activities on the pricing front. We recognize that generating competitive shareholder returns requires that our mills operate safely, produce a quality output and do so at a cost that provides an appropriate return on capital.
In the distribution arena, BMD has done a terrific job of executing and responding to market opportunities at both the local and national level. Effectively managing the impacts of commodity price changes will remain at the forefront for our distribution group this year. On the growth side, [Indiscernible] team are active and seeking acquisitions in specific geographic markets looking at product line extensions and pursuing other avenues to push up sales and earnings.
BMD completed its acquisition of Lumberman’s Wholesale Distributors in Nashville, Tennessee, last week and also announced this planned acquisition of Norman Distribution and Medford, Oregon, earlier this week. I’m pleased to see our efforts to add geographic infill locations to BMD, which we have been discussing for the last year, start to gain traction with these acquisitions.
Commodity Wood Products markets pricing at the beginning of the second quarter was very robust compared to historic levels. Both structural panels and lumber are hovering near peak pricing levels. It is difficult to predict where panel and lumber prices will head this year with demand likely to improve, industry capacity additions coming online and trade issues garnering a lot of attention. Clearly, the direction and rate of change in pricing has a big impact on earnings in both of our businesses.
Our first quarter results have set us up for another good financial performance in 2018, but a lot will depend on commodity pricing for the balance of the year. To close, I want to thank our employees for doing an outstanding job of leveraging the strong market in the first quarter with excellent execution and doing it safely, as we enjoyed our best safety performance in the history of a company last quarter.
I appreciate each of you joining us on our call this morning. We would welcome any questions at this time. Bruce, would you please open the phone lines?
[Operator Instructions] And our first question comes from the line of George Staphos from Bank of America. Your line is now open.
I’ll ask two to three questions at the start and turn it over. Tom, on the supply side, what would you say in terms of how quickly the supply chain would adjust for the dollar in your view? If the dollar went up another 5% or 10% from here, given where spreads are versus cash cost, how quickly do you think we could see some impact from Brazilian imports routs? Should we not worry so much about that because of the Europe? That's question one. Question two. Just how much do you think the plywood markets right now are taking their cue from the OSB markets where obviously there have been some pretty well noted delays and operating issues with existing and new capacity coming on? And then my last question just out of curiosity. Are you seeing any pickup in demand for residuals given some of the fiber issues coming out of Asia? Thank you.
On Brazil, I would tell you that from our perspective, the currency currently I think it's pretty close to $3.5, and with the pricing in the U.S., it's very attractive market for Brazilians. We're seeing similar to last year pretty similar increase in shipments into the U.S. So far it hasn’t had a major impact on the supply/demand balance here, but clearly this would be a very, very profitable market for the Brazilians at this point. From our perspective, it feels like the European market is more profitable for the Brazilians in the U.S. market right now, but at the same time there is obviously limits on how much to go sell into Europe. So I think the real question is going to be as what underlying unutilized capacity exists in Brazil relative to continue to add additional volume into the U.S. markets. As that -- you got what you need to go, George?
It's a good comment. We will follow up later on that point, perhaps. But on the OSB and plywood equation, what we just say there? And then and the question I had on [Indiscernible]?
Well, I think we have a good situation of supply and demand on plywood right now, frankly. Particularly with the growth that we're seeing in AWP, veneer supplies are tight. So veneer has been pulled away from the plywood market. But I would also tell you that the OSB markets are very tight. We had a couple of major outrages on large plants in March-April timeframe. We've had continuing outrages related to freight issue in Canada. And that very tight supply for OSB has driven high prices and there is a substitute for OSB with plywood. I think there is clearly, where we’re in this type of pricing environment with OSB, it helps to lift plywood pricing.
Tom, on that just quickly. Do you think OSB will drive a plywood from here? Or would you think they can disconnect? That was kind of what the question. I didn’t frame it.
So I think if OSB continues to tick up, plywood won't tick with it, just driven by the underlying substitution effect. And vice versa, George. And your third question again, George?
Just residual -- are you seeing any kind of pickup in demand there just given some of the well advertised issues in Asia in terms of virgin fiber?
We are definitely seeing higher residual pricing in the western U.S. right now.
And our next question comes from the line of Brian Maguire from Goldman Sachs. Your line is now open.
Just a question on the EWP volume. They are a lot stronger than we had modeled. And I know there’s really tough comp a year ago when you had some pre-buying. Just wondered if similarly if there could have been some pre-buying in this quarter? And then if you could just comment on your overall production ability there? I mean, if the demand continue to be robust just from the production point of view, what's your capability to keep up with it for the rest of the year?
This is Dan, Brian. On the first question, the EWP - typically when you have a price increase like we had, you do see some pre-buying, if you will. And I think you saw a little bit of that, but I’ll tell you that our order files today, and this quite some time after the price increase, remained very strong on both the East and the West. So it looks like there is some real demand going on. And your second question had to do with our capacity going forward.
Yes, just looking at - yes, if you continue to see the housing market grow high single digits, maybe even double digits, would you be able to ramp your production kind of in line with that?
On the West Coast, we are in a pretty tight situation right now. So we’ve kind of added capacity. But in the Southeast, we do not have all of those assets running at full speeds yet. So we are maybe limited a little bit on our ability to find veneer, but I think we can find some more of that. And we're still ramping up by Roxboro facilities. So yes, I think if it moves 8% or 9% in the Southeast, we are fine.
And then, Wayne, any update on the Winston mill and how that is making progress, ramping up and the other lumber with the capacity beyond that you're hearing in the plywood markets?
Brian, this is Dan again. I think the Winston mill is moving along through the startup curve, and I don't think they’re quite where they want to be yet, but I think they are making progress.
And I’m not hearing anything about new capacity. There continue to be multiple dry rebuilds, and those always put some creek into the industry. But I'm not hearing anybody talk about greenfielding a plan or major, major capacity expansion within the plant right now.
Just last one. And any way you can frame a ballpark the size or EBIT contribution from the two acquisitions that you have announced so far this year? Maybe kind of rough relative to how to think about those?
Yes, we are very purposely not going to put out sales or EBITDA on either one those, just given the materiality. But I think one way to think about it is, if you take mix topline and look at across the 30-plus locations it has, you end up with a number north of 100 million and that includes very large markets like Dallas, Houston, Denver and others, Nashville well below that in terms of scope and scale. And it’s the product mix at Nashville with Lumberman's more narrow than Boise’s oday. And again, we think that’s a great acquisition, but one of the reasons we really wanted to get into Nashville is its one of the faster growing markets in the country. We have been serving at with truck hauls out of our Memphis location, and we think we have got substantial opportunity to ramp up the topline revenue and EBITDA in the Nashville market. And similar story in southern Oregon. That gives us much better freight access in the Northern California, Nevada and the Southern Oregon. So again, the Norman acquisition will be relatively small in terms of the relative revenue impact, but we think it presents a good market opportunity for us in that part of the world.
And our next question comes from the line of [Kevin Mentor] from BMO Capital Markets. Your line is now open.
First question. I'm just curious. I mean, with this rally that we’ve seen in lumber prices and we have hit record levels on and see some of the grids, are you seeing engineered wood are gaining any market share from lumber?
This is Dan again. It's obviously the substitute product, and the higher price the lumber is the one that better it is to sell EWP. But I would say that our demand for EWP is very strong. It's maybe being impacted by that. But if we continued to have strong demand -- strong growth in EWP demand, particularly on the LVL side in spite of what lumber prices do.
Wood generally model LVL volumes slightly ahead of the single family starts. If you still think there is some penetration on the LVL side, with a number of the housing starts being in the southern U.S. or southeast, there is more slab on grade construction. So the penetration on [Indiscernible] is actually lagging single-family starts a little bit. And again, I think there is some substitution effect with lumber, but it's not a backend forth issues, it's a longer-term trend. And you will see some of the multifamily maybe swing based on price. But for most of that homebuilders, one’s they design with LVL or I-joist, it’s pretty sticky in both directions.
I think the key point there is that’s really, I-joist in particular is pretty mature product at this points. It's very sticky in both directions. So I wouldn’t expect the significant drop in I-joist if we saw a significant drop in lumber prices.
Second question. Relative to your expectations at the start of the quarter or at the end of last year looking out into Q1, what are the two or three things that you think kind of exceeded your expectations in Q1?
Clearly where we've gone on handle on lumber prices our levels that normally we would only see in peak summer months, and when things are very tight I think this year -- particularly in the West the weather has been pretty cooperative than northeastern U.S. has had kind of a normal weather. A number of storms grow through. So I think in that part of the world volumes are probably then a little bit weaker in the first quarter than five year. But again, overall I think the balance has been good and the transportation issues I think have clearly contributed just some tightness on the supply side or longer lead times. And frankly I think those are number of people down channel that are having either nervousness around committing working capital at these pricing levels or difficulty in getting product or funding the working capital requirement at these price levels. So I think the demand has been good and people are continuing to go hand and mouth on a lot of products, again because of transportation and because of the absolute valuation. So on the demand side, I think there is a lot of support for the pricing. I think they are pretty good balanced on supply and demand and there is a lot of people with some nervousness, but clearly material needs to move to job sites giving what builders have seen in terms of demand and construction activity.
I would just be very quickly. I would add from my perspective at a tactical level. I think the strength of the markets in the western U.S. been a surprise and they are corresponding really rapid escalation of log cost in the specific northwest it's been a surprise as well. Those are I think pretty meaningful impacts on how we perform every quarter.
So just on those two things, so have you started to see these transportation trucking issues kind of ease as your move into May? Or you think it is going to take longer to get back to normal trend?
This is Nick Stokes. At this point, we have not seen a significant improvement particularly in rail out of Canada. The trucking issues at south of the border didn’t get as bad as the rail out of Canada did, but it's still a challenge and I don't see anything at least over the next several weeks to months that indicate that it will be less challenging going forward.
And then one very quick one. How much was the West Coast log prices and high OSB kind of a drag on your results either year-over-year or quarter-over-quarter?
Yes, I’d tell you that primary stock for the log costs increase has been in the Western Oregon, Pacific Northwest, and it’s probably if you look at it on first quarter compared to first quarter a year ago, the price component is about $8 million drag. And OSB, similarly, if you compared first quarter '18 to where we were a year ago on the web input, it’s about $6 million negative drag.
And our next question comes from the line of Reuben Garner from Seaport Global. Your line is now open.
So just following up on that last question gave a couple inflation numbers, can you kind of maybe at today's pricing levels where -- what that drag would be over the next couple of few quarters as it retains the lower cost and OSB prices? And then maybe if you could add in transportation costs, what drag was in Q1 and what's your outlook is for the next few quarters?
I think on transportation, as Nick alluded to, I think the change in trucking will probably in the 5% to 10% range. But particularly in distribution we tried pass that through in pricing to the customers. And on Dan's business, we are going to see it on increased costs on inbound delivered logs. And we haven't seen a huge ramp in transportation costs in wood. On log costs in the Northwest, the absolute levels I think as long as dimension lumber persists that the level hit that. it’s going to drive higher log cost particularly in the west and export situation. Demand in Asia, we are likely to see that continue at the levels it is. It started to move up late last year. So you will probably be from a price standpoint in the Northwest that $8 million per quarter drag will likely continue through most of this year and we will start anniversary that as we get into the latter part of '18 and early in '19 if it doesn’t roll over before then.
On the OSB side, we had very strong panel pricing particularly following the hurricanes in late '17. So I don't know that we will see the same kind of $6 million drag as we get into like third quarter, but certainly we have still got a negative comp on second quarter and we will see what happens as OSB plants come on in late second quarter, early third quarter. That does to panel prices. But certainly we will have another negative comp in 2Q on both of those issues.
And then on the distribution side the couple of acquisitions to start the year can you want to update us on your geographical exposure now and maybe how many markets do you have left that you can better serve given through greenfield or M&A and then maybe discuss what you think the impact maybe from the big merger in the States earlier this year, whether positive or negative in the near term or long term?
I think in terms of the geographic fill-ins Norman in my mind will represent the third kind of recent one we've done. I mean we ended up with the team in St. Louis, where we decided to essentially Greenfield. Nashville as to fill-in. Southern Oregon is fill-in. I think if you take the U.S. map, there is probably four or five other markets where we’re continuing to spend a fair amount of time and working in a couple of cases in conversations with people where we currently do business, and we will see how that develops. But I would tell you it's probably 4 or 5, it's not 10 or 15 in terms of geographic fill-in. And Nick's team is spending a lot of time on products expansion and also spending a lot of time in multifamily, like commercial and in the industrial category, and we're getting pretty good sales lift on those efforts as well.
Our next question comes from the line of Chip Dillon from Vertical. Your line is now open.
Could you give us an update -- and I apologize if you talked about this. I wasn’t on the first few minutes. But where Roxboro stands? It seem like that the expectations longer term are more a little diminished, but yet the market obviously continues to develop and grow. And is there any plan there to maybe see that that plant, the Roxboro plant, run more consistently especially if the demand stays strong?
This is Dan Hutchinson. Yes, there is certainly is a planned to have it run more consistently. I think we're seeing over the last couple of quarters real progress on the press that we restarted there. It's quite a really comfortable about how that's going it's getting up towards on a consistent basis towards the levels we needed to. We restarted the I line a while back and we’ll be shipping out of there by the end of the quarter. So starting to feel better about it and clearly our intention is to get it running on a consistent steady basis. And with the demand situation, we've got I'm sure it will be a good contributor for the company.
Okay, and then on a second question. You gave us the guidance for the CapEx for this year and you still have the situation where - well, first of all I’d love your opinion on this. Do you feel that housing activity is still constrain relative to what your people would like to be able to do in terms of build because of labor and permitted land lot availability. But - so first of all I would like to know if you still see evidence of that, because it does seems strange that if you we kind of just parachute out of here now and you look at us talking about under 1.3 million starts, 10 years after the crisis, 12 years, with a population of exceeding 50% bigger when we use to see 1.6 to 1.8, you kind of wonder why it is still down. And with that in mind, do you feel the right course in terms of your CapEx is to stay at or near current levels? Or are you thinking of cutting back or actually maybe expanding in some significant way in the next couple of years and maybe ways as don’t know about.
This is Wayne, and a lot of fingers pointing saying I should answer this one. I’ll be honest with you. I think on the manufacturing side we are going to continue to fill out our EWP mill, as Dan alluded to. I don’t see us adding meaningful capacity to what we view on our manufacturing footprint. I’d rather be short than long and add the overcapacity. And while there is, as you know, good continued demand in single-family growth, there probably is long in the tooth and that’s been to your point much slower than in any of the dentist paid. I would rather put frankly at this point the cycle put dollars into the mills and we really want to defend, make sure the low cost well maintained. And that will give us some productivity creek. And more importantly, it will position us from a cost standpoint for the eventual downturn whenever it comes. Having said that, on the distribution side, we continue to work with Nick’s group pretty heavily to make sure that he's got real state and the footprint to support continued organic growth. And he has got a number of markets where we’ve added to the footprint. We’re working on some stuff in New Jersey, for example. Done the St. Louis build out. We’ll I’m sure over the next 18, 24 months scale up the footprint in Nashville. And similar to Dan’s situation, I think, if we deploy additional capital, it’s probably -- partially to support what Nick's doing from growth in this cycle, but it will be to increase the resiliency of his business and reduce fixed costs for the eventual downturn in the next cycle.
And I would add, Chip, on that. From our perspective, that $75 million to $85 million number that we've been talking about for a few years now I think reflects that we think we need to spend on the assets that we own today to keep them competitive. And there may be some things on the margin that will make sense. But I don't see anything that would materially change that number significantly up or down relative to the current asset base we have.
Got you. One in just very general question. When you guys came public what six years ago, I think you were talking in terms of a mid-cycle EBITDA of around $250 million and since then you added the plywood mills in the East, you added the GP EWP mills. And I don’t maybe those are not going to be quite what you thought. And then of course now you have made these acquisitions and distribution, not to mention. I would guess that business is doing better than certainly we would have thought. It’s a great business. With all that adding together, would your view of a mid-cycle, not peak but certainly not trough, be north of $300 million?
Well, Chip, let's make sure we are both talking about the same definition of mid-cycle. What do you think housing starts are at mid-cycle, 1.3 or 1.4 or what do you view as mid-cycle?
I’d say that that's a probably good place to be certainly in my heart it feels like that, but my head keeps telling me it should be higher given the population, by listing it’s 135. So that means we are not even there yet.
Yes, I think the efforts we have got underway in Nick’s business with the organics and with the geographic fill-in, we originally said we would get that business to somewhere around $3.8 billion to maybe $4 billion of revenues. I think given what we're seeing and given what he has been able to do from a growth standpoint some of these geographic fill-in, there is probably another $0.5 billion of revenue there that I think where we were in early ’13, I would not have said that we will pushing towards $4.5 billion or $5 billion, and obviously some of that depends on where we are in commodity prices. So we have recently said somewhere around 120. We thought we would get 5 of the synergies - or of 6 of synergies out of the GP acquisition that would fall on Nick’s side of the ledge. And so I think we've got a pretty decent shot at Nick’s business mid-cycle been in the 130 to 135 kind of area and then he looks 140. Again, some of some of that maybe funded with acquisitions, so you got to be a little bit careful. And on the wood product side relative to what we thought in ’13, if you could take snapshot today, plywood prices are well above where we thought we would be. We thought we would be somewhere around the 295 level, and obviously this quarter we are at 356. We would not have thought we would be the OSB costs or log cost that we are currently seeing. So I think in the wood business, if we can push towards the 175 to 180 kind of area based on what we're seeing on input cost I'd feel pretty good about that. But I wouldn’t sit here today and say that where anywhere close to mid-cycle pricing on plywood. I think we've got upside pricing from here on EWP and we are working hard every day on the realizations hopefully we will see able to retrenchment on input cost on OSB and logs but I think that business is probably a 175 to 180 business based on what are you seeing today so I still think in total were probably north of 300 at mid-cycle but I think more of the contribution is likely to come out of the distribution side then we would have anticipated and slightly less out of the wood product side.
Our next question comes from the line of Dan Jacome from Sidoti.
Just wanted to go back on Lumberman's very quickly very high level. Just wondering if it brought you any news third-party relationships, or it was just more overlap with your current, relationship base and as you said you wanted to get into the Nashville markets first? And then I don’t if you can talk about this, but maybe there LBL, I-joist penetration or maybe some just like a very high level thought on what sort of mix it may have brought to you guys?
This is Nick Stokes. As you expect there are some regional suppliers that have a heavier presence in Nashville than we have historically been exposed to, so there was a little bit of a drag along. One of the key attributes for both Nashville and Medford was the relationships that they have with suppliers and customers and how well regarded they are, and in many cases those suppliers are ones that we’re currently doing business with them. As it relates to EWP and Nashville, obviously that's a big component of their current business. They've been very successful of doing that and we expect to add to continue.
They are distributor for Boise Cascade on the EWP side and we've had a very longstanding relationship with the management team there on a commercial basis. And as Nick said, they overlap on some of the key supplier that we would want in place as we going into a new market. But the transition knowledge of the management team, integration risk we considered quite low, and the same is true for Norman.
The other thing I’d add is we expect zero supplier issues based on the integration of both of those operations.
And then just thinking about future opportunities on the distribution in sell side, do you think the low-hanging fruit is on like things of - and I’m no expert here, but like bulk brick packaging or maybe just straight plain vanilla customer service and marketing? Or is it all of the above?
It’s all of the above.
All right. Fair enough. And then do you have a very high-level outlook on repair and remodel as we think about the next 18 to 24 months? And that was it from me.
Generally, we think repair and remodel activity will be favorable. We have had good employment growth, good move-up in home values. Interest rates are still reasonably low. So the backdrop you need in terms of existing home sales, employment, et cetera are all very favorable. So we are still thinking -- we probably see 4% to 5% growth in repair and remodel, and it’s a pretty positive impact in general.
And we have a follow-up from the line of George Staphos. Your line is now open.
I want to dig in a little bit to BMD and the incremental margins that you saw in the quarter. And you mentioned that between getting some terrible pricing tailwind as you would expect in this kind of environment as well as I think you said good operations and leverage there that's what drove the margin. Were you surprised when you look back and how you converted that revenue and pricing in terms of incremental? I think I got like 7%. And is the typical benchmark still around 4% on a going-forward basis. Or do you think you through various means as have raised your ability to convert revenue growth into EBIT or EBITDA growth going forward?
Well, I’d be remiss and I think Nick would kick me if you told you that 7% wasn’t the appropriate number to think about. I think in our internal conversations we are still thinking 4% to 4.5% is the right number to think and that’s somewhere in the 3%-plus I think probably towards more of than the 3.5% on a EBITDA margin just given the scale and the occupancy leverage that we are getting at this point. But I’d caution everyone, as you think about like where we are today second quarter versus first quarter, first quarter benefited from going from low to high and about a 20% or 25% lift in commodities as we went from January to March. We are -- those elevated price levels today, but if they held constant in second quarter, Nick’s business will not have the same tailwind on gross margin that he would have had in first quarter. So you’ll get the benefit of the higher revenue dollars and the expense leverage, but on a percentage basis you will get more lift in gross margin in the rising environment than you will at an absolute that’s static and higher. So I’d be cautious on implying that we will get 7% leverage on revenues going forward. I still think that 4% to 4.5% over some kind of reasonable commodity pricing environment is the more appropriate level. And again, given the volume that Nick’s group has been able to do on growing the business and capturing share that EBITDA trend level may be more towards the 3.5% and the three weeks spoken about in the past, but I'd would be very cautious about assuming that would be 7% EBITDA leverage on new revenue.
I just asked the question and should heat it a little bit in a different way. If I apply even 3.5% to kind of an incremental revenue growth, and you are saying it $1.5 billion, $3.8 billion to $4 billion of revenue and now maybe you can push towards $4.5 billion. The EBITDA goal for mid-cycle ones are mathematically higher than what you appear to be comparable with. So recognizing were probably overanalyzing this, is there a reason other than just the law of big numbers and what kind of pricing cycle we've seen and the benefit would we’ve given to BMD, why the next tranche of revenue growth again in that business doesn’t quite convert at a normal incremental margin for BMD.
Well again, I mean, if I would say 3.25% $4.5 billion I guess $146 million for EBITDA. So whether it's $145 million or $155 million, I'm not that smart, but Nick did a $132 million on EBITDA [Indiscernible]. Yes, 3.7% of revenues. So if put $15 million of incremental EBITDA on $700 million of incremental sales, it would take the $3.5 million, it would imply a leverage of 2% roughly, if I'm doing my math right. And it would cost renew the $3.5 million may not be the trend level of EBITDA. And again I think we had favorable commodity pricing in '17 and clearly had very favorable pricing in first quarter of '18. And while I'm comfortable about our execution, I also don’t people to get ahead of what is an appropriate return on capital for the business and what we see in terms of returns on investment. Because again we compete with a number of people and we've got large vendors and large customers and we are realistic about what return on investment we think we can sustain and before people look at re-large or look at going direct who are willing to take more working capital risk and I think if these price levels Nicks guys have done a very nice job of selling material out of warehouse and taking advantage of some reluctant on the buy side to take inventory position so I think these guys are doing a great job on managing the commodity volatility and getting out of warehouse business or using our willingness to take risk on commodities as a way to leverage business and profitability. But I don’t know that will be a sustained environment.
Understood. It did reminds me of the phrase, “No good deed goes unpunished way”so anyway.
Yes, and I think are guys are doing a great job and I don't want just to be the negative, but I also wanted to be pretty realistic.
We appreciate the color. Two last ones from me and I’ll turn it over. I think -- talked about freight I had a question just on lead times, is their way to rely what average lead times are now across your businesses by sector however we would like to relative to say a year ago? That's question number one. And then if you look at veneer operating rates, I don’t know if you could rely those, but where are you now versus a year ago?
This is Nick. As it relates to the lead times, I’d have to do a little bit of [indiscernible] in the data that get to you I think that number. My stand says that it depends on the products a bit. So if you think about would commodities on the panel side -- on the plywood side lead times are probably what they were a year ago, on the OSB side, they are probably touched longer but not significantly longer, except for the associated rail issues out of Canada. Certainly the mentioned lead times both in terms of mill and rail issues in Canada are significantly longer than they were a year ago. On the general line side, probably about same, with the exception of some metal products that have been embroiled in a series of tariffs and those kinds of conversations. Those are longer than they were a year ago. And I think Dan has already talked about the EWP wood lead times on EWP products.
I don’t - call that number. If you could relate, that I’d appreciate that.
That’s the best I got. I think EWP lead times are out just a little bit longer than they would have been a year back.
This is Dan. It’s a question on the near operating rates is -- is that the question, what percentage of our veneers going EWP?
More right now relate to your available in veneer capacity, what are you pulling at and might you need to put in a little bit more capacity at some point?
So if you think about it really across the system, we are maximizing our internally generated veneer capacity where it makes sense to go into our EWP. We have some plants -- plywood plants are too far away from the facility so we don’t use those. We are also more aggressive than we were a year ago outside purchases of veneer on both the west and the southeast. In addition to that you think it about going forward we have some capital projects primarily in the Southeast, which we will do over the next few years, which will increase our veneer capacity and that will increase our EWP capacity. So as we look forward, we will be spending capital to get out that as the market continues to grow and continuing to realign ourselves with outside suppliers of veneer.
What I’d say though as far as I’m aware, all the veneer capacity in United States is running hard today. The dryers are full. And at this point to the degree, EWP continues to grow and we are going to see a diversion of veneer very comply with towards EWP. Obviously Brazilians would be the wild card on capacity in the U.S. right now.
And we have a follow up from the Brian Maguire. Your line is now open.
I couldn’t like to get off without a question on capital allocation. So I think last quarter you talked about you may become back to this question about what do you with the cash after you went through the seasonal working capital build in 1Q. In other words, sort of through that obviously it’s a great quarter. You have done a couple of smaller deals. It sounds like nothing massively in terms of uses of cash there, and I know before you said these are market cash balance getting above 150 [ph], it seems like we might be with the seasonal release of working capital and earnings pickup might we get into that level. So just maybe you could kind of frame how you're thinking about redeploying cash to shareholders in particular at this point.
Brian, this is Tom. I would tell you I don’t think we are thinking about it dramatically different than we have and it’s pretty much as the same we’ve gone through. We do have a few things in the pipeline on the distribution side and those come to fruition or they don’t, but we continue to explore. I would tell you from while we haven't been successful on a couple things recently, it feels like the things we think it should be in a prices are getting closer to the things that other people think ought to be the price. Maybe we’re a bit more competitive in that space. So we are continuing to look at infill. We continue to look at adjacent distribution opportunities. I think Wayne mentioned earlier that we are looking at our small contribution to our pension plan later in the year. But borrowing a significant acquisition issue and assuming continued performance along the line, I think you are assessment on cash flow is correct and I think this would be a topic as we sit down at work and it's been ongoing topic. But our fundamentals view that we should -- we don’t have a reasonable way to deploy our -- if there is a reasonable -- if we don't have a reasonable way to deploy the cash, we will continue to think about how we return it to our shareholders.
And does the special dividend is still under that conversation or is that moved to the back burner relative to other options? Or is there anything that you think would be a preferred method for returning cash?
And this is just praising, but if we decided to go through the dividend mechanic, we will try to describe in a way that doesn’t leave the market thinking that it's a change in our regular dividend. But to Tom’s point, I think we want to make it clear that this is a set of behavior that we would anticipate engaging in from a capital allocation on more than one occasion. So if our operations continue to generate significant free cash flow, if we don’t have a have good organic uses for it, if we don't have acquisitions in the pipeline, and if we don't needed from a leverage standpoint to reduce debt, our intent would be to return at the shareholders. And whether you call it variable dividend or a special dividend or whatever, if we find ourselves in a situation -- we currently find ourselves and as we move through '18, we would not do that as a special in terms of this is one-time only. But again, we have various ways of getting capital back to the shareholders and it was a conversation again with the board this week in anticipation of what the back half of this year is going to look like from a cash standpoint. And again borrowing something more sizeable than the Lumberman’s-type deals and the Norman-type deals, even if we did a couple of more of those this year, we would still find ourselves in the cash positions that’s longer than we need and longer than we think is appropriate. So it's likely to be a conversation when we meet with our board in August.
Assuming we say we stay on the current trajectory in terms of pricing.
And we have a follow-up from the line of [Indiscernible].
So just not trying to drop two fine a line on what you just said, but it sounded to me that you all are more open to having a variable dividend than having -- then doing kind of a one-time special dividend. Would that be a fair characterization?
Well, again, I think our priorities are grow the company in a way that adds value for our shareholders. So I don’t wanted to describe it as variable dividend because if we find ourselves with a $100 million acquisition opportunity, that we think is going to generate significant value for our shareholders, that would take precedent over any kind of a variable dividend or a special dividend.
We have got the quarterly regular dividend that we view is being [Indiscernible]. And hopefully over time as we continue to grow distribution and move towards EWP, our cash flows normalize at a level where overtime we can increase our regular dividend as well. But I think what Tom and I and the board are focused on is we view part of our stewardship as trying to generate compounded 10% returns on capital. And if we don't have good opportunities either organically on our acquisitions to do that, we are going to give the money back. And there will some combination and share repurchases and dividends TBD. But I think we don’t view having high-accessed balances of cash. If we don't see good opportunity in the acquisition pipeline, we don't think the option value on the cash. It’s appropriate for us to stockpile things. And again, we are very focused on making sure we capture the value and its upside, and we will be making investments over the next 24 months to make sure that we have the resiliency to right out whatever the next downturn is when it comes.
I’d add that as we think about it, we are going to continue to focus on our liquidity because I certainly, to Waynes point, weather the downside and I also would like to be positioned to be able to acquire in the downside because they are obviously more favorable values. But that doesn't mean sitting on the mountain of cash at 2% returns.
That’s actually very helpful. And just one last question. I’m sorry if I missed this. But for Wayne, any sense just order of magnitude, and I know you all have not decided this yet, but if you were to decide on making the pension contribution, just order of magnitude, how much would that be?
I would day opened for a reason amount of debate. I’d think about $20 million as kind of a midpoint, but I would tell you it could be higher than lower than that, but it’s certainly not $50 million or $100 million. I mean, it’s a smaller number. And thankfully having transfer roughly a third of their liabilities and assets over the prudential, relative to our market cap, the remaining plan is reasonably small. And when we remeasure, I think we will be in pretty good funded place. So don’t anticipate the pension being a big drops funds, and if we did it, it would probably be more to set us up to be exit more of the pension liabilities sooner rather than later. That would be the tactical and strategic reason to do it. And again, to take advantage of the 35% federal tax rate in '17, we have got a limited window to do that.
And our next question comes from the line of George Staphos.
When you talked about investing to right out the next downturn, I was wondering if you look at your operations right now. And you assumed pricing consistent with what we saw back in 2008 and 2009. Across your system, how many of your mills would be below breakeven in terms of EBITDA? How many would be or what percentage would be neutral or positive? Have you don’t that analysis and where do you stand and trying to move down up the curve depending on your perspective if in fact that’s the right way to look at it.
That’s one of those kind of “angels dancing on the head of pin” question and I hate to be flipping about it. But the reality is, in particular both businesses are margin businesses and the kind of the levered all this is woods costs. And it's already the question of how long it takes for a log price adjust back, for OSB prices to adjusted back, you are thinking about input cost and so EWP business. My experience I think as those things do adjust, the really challenging part is than the downturn typically is driven by a pretty major drop in demand which really causes some challenges on the cost side that are harder to control internally. But we have not been through that exercise analytically although obviously we've been through it from a couple of times experientially, and I think we tend to work through that pretty quickly.
I was going to say I think there’s really two question, George. If you said pricing and loan drops but volumes fall by 8% or 10%, you get a very different outcomes and if we are going back to 600,000 or 700,000 housing starts. So if the volume is there and we can amortize maintenance cost over has a mix business, if we can cover occupancy, you get a very different outcome than if you said volumes fell by 40%. I think given what we've done to support mix business on the real estate side, you get a negative leverage obviously on occupancy cost. And Dan business, if we -- on the EWP mills in particular, if were running now at 75% or 80% in capacity, you get a very different outcome than if they are running at 40%. And again, well I think we did a very good job last downturn and thinking how to manage that situation, so I think we will do better in the next downturn whenever it comes. But it's really the volume component is as important as thinking about what are the price level is.
Understood and I was thinking probably more about the wood business and that's maybe more comments. Whatever assumptions you would have ultimately in terms of pricing and volume in the next downturn, it would be interesting to see what your capacity, how much of your capacity would be breakeven versus above or below water. But again, you did real well last downturn, so maybe that's a lesson in itself. Anyway, to be continued. Thanks again guys. We’ll talk to you soon.
Thanks, George. To wrap up today, I guess I would just fill quick comments. This is Tom. We are obviously pleased with our first quarter performance from a safety, operational and profit perspective. Distribution is progressing acquiring geographic until distribution is particularly encouraging. And I believe we are very well position to take advantage of the strong market we are currently enjoying today. Thank you again for joining us today and have a great weekend.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. And you may all disconnect. Everyone, have a great day.