Boise Cascade Co

NYSE:BCC

Earnings Call Transcript 2018-Q2

[Operator]

Good morning. My name is Katherine and I will be are conference facilitator today. At this time I would like to welcome everyone to Boise Cascade's second-quarter 2018 conference call. [Operator Instructions]. Before we begin I'll 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 expectation 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.

[Wayne Rancourt, EVP, CFO & Treasurer]

Thank you, Katherine. Good morning, everyone. I'd like to welcome you to Boise Cascade's second-quarter 2018 earnings call and business update. Joining me on today's call are Tom Corrick, our CEO; Dan Hutchinson, Head of our Wood Products operations; and Nick Stokes, Head of our Building Materials Distribution operations.

Turning to slide 2, I would point out the information regarding our forward-looking statements. The appendix includes reconciliations from our GAAP net income to EBITDA and adjusted EBITDA. Now I'd like to turn the call over to Tom Corrick.

[Tom Corrick, CEO]

Thanks, Wayne. Good morning, everyone. Thank you for joining us for our earnings call today. I am on slide 3. Our second-quarter sales of $1.4 billion were up 24% from second quarter 2017. Our net income was $41.8 million or $1.06 per share, up substantially from the year ago quarter. Reported net income for second quarter 2018 includes $9 million or $0.23 per share of after-tax losses from non-cash pension settlement charges. Our Wood Products manufacturing business reported segment income of $36.5 million in the second quarter, more than double the $15.4 million of segment income in the year ago quarter. Wood Products benefited from elevated pricing on plywood and much improved EWP sales realizations compared to last year's second quarter.

Our Building Materials Distribution business reported an outstanding second quarter with segment income of $47.7 million on quarterly sales of $1.2 billion. BMD executed well in the quarter by growing volumes and taking advantage of tailwinds and commodity EWP and general line pricing.

Wayne will walk through the financial results in more detail and then I will come back to describe actions we are taking on capital allocation and to provide our outlook before we take your questions.

[Wayne Rancourt, EVP, CFO & Treasurer]

Thank you, Tom. I am on slide 4. Wood Products sales in the second quarter, including sales to our distribution segment, were $425.5 million, up 21% from second quarter 2017. As Tom mentioned, Wood Products reported segment income of $36.5 million in the second quarter. Reported EBITDA for the business was $55.9 million, up 82% from the $30.7 million of EBITDA in the year ago quarter. The increase in EBITDA was due primarily to higher sales prices for plywood and EWP offset partially by higher log costs in the Pacific Northwest and higher OSB web stock costs.

BMD sales in the quarter were $1.2 billion, up 24% from second quarter 2017. Sales prices and sales volumes increased 15% and 9% respectively. BMD reported segment income of $47.7 million or EBITDA of $52.2 million. This compares to segment income of $34.5 million and EBITDA of $38.5 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 amount 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 $22.3 million in the second quarter of Q2 2018 compared with negative $7 million in second quarter 2017. The non-cash pension settlement charges negatively impacted EBITDA by $12 million on a pretax basis.

Turning to slide 5, our second-quarter sales volumes for LVL and I-joists were up 3% and 5% respectively compared with second quarter 2017. Pricing in the second quarter for LVL and I-joists was up 10% and 12% from the year ago quarter. We expect to see continued improvement in EWP net sales realizations as we move through the rest of this year.

Turning to slide 6, our second-quarter plywood sales volume in Wood Products was 369 million feet, flat with second quarter 2017. We lost 12 days of production in June at our Chester, South Carolina mill as a result of a boiler fan failure. With the exception of the disruption at Chester our veneer and plywood mills operated well during the quarter allowing us to take advantage of unusually strong plywood prices.

The financial impact of the Chester outage was approximately $1.5 million, most of which was reported in Corporate and Other as part of our self-insured risk retention. The $379 average plywood net sales price in second quarter was up 26% from second quarter 2017. Plywood pricing in the second quarter was well above historical averages.

On slide 7 we have a chart showing the random lengths panel composite for 2016, 2017 and thus far in 2018. OSB and plywood pricing began to weaken in June and has continued to decline early in the third quarter. We expect plywood pricing to continue to moderate as new industry capacity in OSB continues to come online and the transportation constraints experienced in a number of regions in the first half of the year are addressed.

Changes in the volume of plywood imports from Brazil did not have a meaningful impact on the supply/demand balance in the first half of 2018, but imports may become a bigger factor later this year. Obviously structural panel pricing is a key revenue and earnings driver for both of our businesses. Dimension lumber has experienced similar declines since June.

Moving to slide 8, BMD second-quarter sales were $1.2 billion, up 24% from second quarter 2017. By product area BMD sales of commodity products increased 33%, general line products increased 15% and EWP increased 18%. The gross margin percentage for BMD in second quarter was 12%, down 10 basis points from the 12.1% reported in second quarter 2017. BMD's EBITDA margin was 4.3% for the quarter, up from the 3.9% reported in the year ago quarter.

On slide 9 we have set out the key elements of our working capital. Company net working capital excluding cash, income tax items and accrued interest decreased $21.9 million during the second quarter. Accounts receivable, inventory and accounts payable all increased with the seasonal increase in sales.

Growth in accrued liabilities related to incentive compensation and customer rebates drove the reduction in net working capital. A significant portion of these accrued liabilities will pay out in first quarter 2019. The statistical information filed as Exhibit 99.2 to our 8-K has receivables inventory and accounts payable data broken down by segment for those that are interested in more detail.

I'm now on slide 10. We finished second quarter with $210 million of cash. Our total available liquidity at June 30 was approximately $605 million, which reflects our cash and our availability under our committed bank lines. Our capital spending excluding acquisitions is expected to be between $75 million and $85 million this year. We continue to expect our effective book tax rate to be about 25% going forward.

Our cash tax rate this year will be well below the 25% because of advanced tax payments in 2017 that were refunded in 2018 and a planned $20 million pension contribution this quarter, which is deductible at the 2017 effective tax rate. With that let me turn it over to Tom to discuss the actions approved at our Board meeting last week.

[Tom Corrick, CEO]

Thanks, Wayne. I am on slide 11. As we have discussed on past calls, we are working diligently to grow Boise Cascade and deploy capital in a manner that creates value for our shareholders and other key stakeholders. I am pleased that our Board authorized proceeding on additional strategic spending at our Chester, South Carolina plywood plant to modernize the log utilization center and replace a second dryer.

Some of you will recall that we completed a similar dryer replacement at Chester in 2015. We have made considerable progress on the operational condition of Chester since the acquisition in 2013. The planned projects will put the mill in a very strong competitive position going forward.

In distribution Nick and his team continue to look at acquisition opportunities similar to our recent acquisitions in Nashville and Medford. We remain disciplined on the acquisition front as there is significant competition for good businesses and we are striving to be efficient with investment activities.

Our Board also approved a $1 per share additional dividend which will be paid concurrently with our regular $0.07 per share quarterly dividend in mid-September. We also announced a second pension risk transfer with Prudential Insurance this morning. We will make a $20 million pension contribution this week to take advantage of the 2017 federal tax rate and put us in a position to derisk our remaining potential liabilities by closely matching the pension asset portfolio to the liability structure.

Moving to the outlook on slide 12, the July consensus estimate for 2018 US housing starts is $1.32 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 encouraging and is providing support for our key product markets. We continue to believe the demographics in the US will support an eventual return to normal housing starts at 1.4 million to 1.5 million starts.

In addition to favorable housing trends, we have a number of areas within our control in Wood Products and BMD to continue to provide revenue and earnings growth. Our pricing efforts on EWP are showing solid traction and we believe we have additional opportunities ahead.

Wood Products is striving to optimize usage of internally produced and purchased veneer into engineered wood products as demand improves. This captures more system margin and allows us to be flexible in responding to changes in the plywood market.

We are seeing measurable results from our operational and reliability improvement efforts in Wood Products which are just as important as our activities on the pricing front. We recognize that generating competitive shareholder returns requires that our mills operate safely, produce quality output and do so at a cost that provides an appropriate return of 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 of our distribution group in the second half of this year. On the growth side Nick and his team are active in seeking acquisitions in specific geographic markets, looking at product line extensions and pursuing other avenues to push up sales and earnings.

Commodity Wood Products pricing has been declining from elevated levels since mid-June. We expect lumber and structural panel prices to stabilize as we move past Labor Day and into the fall construction season. However, transportation, trade policy and a number of other factors beyond normal supply and demand continue to influence the markets. The direction rate of change and pricing for the balance of the year will impact earnings in both our businesses.

To close I want to thank our employees for doing an outstanding job again in the second quarter and working safely. I appreciate each of you joining us on our call this morning. We would welcome any questions at this time. Operator, would you please open the phone lines?

[Operator]

[Operator Instructions]. Our first comes from George Staphos with Bank of America Merrill Lynch. Your line is now open.

[John Babcock, Bank of America Merrill Lynch]

This is actually John Babcock on the line for George. Just wanted to start out on the market here. Just was wondering if you could talk about essentially where order files stand at your plywood mills and also how inventory levels look in the supply chain.

[Dan Hutchinson, EVP, Wood Products]

This is Dan Hutchinson, good morning. Our order files look reasonably strong. At the plywood facilities, we always try and keep a few weeks out in front of us. So I think we're in good shape there. And I don't -- as far as inventory and supply chain, I think I might turn that one over to Nick and let him opine on that.

[Nick Stokes, EVP, Building Materials Distribution]

As you know, there's no specific data that gives you an overall feel for the inventory in the supply chain. I would tell you anecdotally, in chatting with our customers and other suppliers, the sense is that there hasn't been much ordering in the last six or eight weeks given the commodity price decline.

And so, I don't think there's an abundance of inventory in the channel. And I don't think there's a big time shortage, but I would expect folks to be reentering the order cycle here over the next few weeks.

[John Babcock, Bank of America Merrill Lynch]

Okay, thanks for that. And then next, I really wanted to touch on the transportation markets and the impact that has had on operations in 2Q and also what you have seen so far in 3Q. And then also, are there certain markets that are perhaps more challenging than others?

[Nick Stokes, EVP, Building Materials Distribution]

This is Nick again. I would tell you that on the inbound rail environment that we faced last winter and early spring, that has essentially disappeared. I think the railroads are running much better, more traditional lead-times, more traditional transportation cycles, those kind of things. On the trucking side of the equation, both inbound and outbound, it continues to be a challenge in terms of being scarce and being expensive and we're just managing through that as best we can. I think that's an industry-wide situation and circumstance and I think everyone is adjusting to that going forward.

To your other question about are there specific geographies that are more difficult from a transportation standpoint, I don't know that I have an opinion or even any data that would suggest I know the answer to that. So, I am drawing a blank for you there.

[John Babcock, Bank of America Merrill Lynch]

Okay, and then the next question just on the tariffs, this was touched on a little bit in the commentary. Just want to get a sense for Boise's initial thoughts on the potential impact of China's latest tariffs on Wood Products, but also on logs and how you expect that to impact the market going forward.

[Nick Stokes, EVP, Building Materials Distribution]

I would tell you that anything that creates uncertainty generally puts more friction on the supply chain and puts us in a better position on the distribution side, because people will want to take stuff out of inventory. On the logs we really haven't seen much import on the export logs. But I suspect over the next two to three months there will be more sorting out between the US and China. Because the list of what is being impacted by tariffs continues to get longer and longer, so hopefully people will put their heads together and come up with a better solution than 25% taxes on things in both directions.

[Tom Corrick, CEO]

This is Tom. I would add in the distribution business there is a transition as the tariffs are put in place, but we are a margin driven business and price off the delivered cost of our products. So, the impact is higher prices, but we are clearly intending to pass those increases on to our customers.

[Operator]

Our next comes from Brian Maguire with Goldman Sachs. Your line is now open.

[Brian Maguire, Goldman Sachs]

Just a question on the Chester investment. I was wondering if you could give some more details on the size of that investment. Maybe the timing and any impact that might have on CapEx next year versus the $75 million to $80 million this year. And maybe the expected return you might target on that project.

[Dan Hutchinson, EVP, Wood Products]

Brian, this is Dan Hutchinson again. There are two things that we're doing there. One is putting in a new dryer and the other is fixing the LUC for the front end of the mill. The combination of those two things will add some incremental veneer, but primarily we are replacing old equipment.

We hope to have that work done by -- definitely by the end of the second quarter. The dryer should be fully delivered by the end of -- sometime in April, and the LUC work we will be doing a little bit ahead of that.

[Wayne Rancourt, EVP, CFO & Treasurer]

So, in terms of capital impact, I don't -- just given the timing of the project, I don't see any impact on 2018 CapEx. And I think as we look forward to next year the impact to that would be somewhere in the range of an additional $10 million.

[Brian Maguire, Goldman Sachs]

Maybe just a question for Nick. Just how are you managing the volatility in Wood Products prices and your own inventory levels? I know in the past you guys tend to be a little bit more cautious than the overall industry. Just wondered how you are managing that. And just sort of related general question for Wayne on impact to inventory prices. And with the sharp decline we are seeing, any thoughts on whether you might have to take an inventory charge in 3Q if these levels hold?

[Nick Stokes, EVP, Building Materials Distribution]

When Tom said in his opening comments that managing the down cycle was at the forefront of our concern I think he understated it. This kind of environment, as you know, is challenging because what we're trying to do is balance our customer service commitment to having product, product availability and quick cycles against the expectation that product costs will continue to decline. So, we will do -- we are doing what we always do, balance the need for that, make sure that we are buying and selling every day, keeping the inventory moving and satisfying the customers and that's kind of the forefront. As to the economic impact, I will let Wayne weigh in on that.

[Wayne Rancourt, EVP, CFO & Treasurer]

Yes, I think the big thing, Brian, is what happens between now and the end of September. If you look at the first five or six weeks, we've had pretty sharp declines in panels in lumber. And generally the commodity products for us turn quickly enough that if we find a bottom here in the next couple weeks we will have sold through most of the inventory that you would normally think about having a write-down on at the end of September. But it would clearly have a negative impact on margins. One of the things you could look at for reference is if you go back to second quarter of 2013 was the last time we had a protracted decline in commodity prices that impacted distribution. And that lasted basically from the beginning of April through the end of June. And by the end of the quarter we did have to take a lower cost to market adjustment.

Again, I'm not expecting that this quarter as long as prices find a bottom by the latter part of August and into September. But I think I would use second-quarter 2013 as an instructive on what the impact on margins might be if it continues down another five or six weeks from here.

[Brian Maguire, Goldman Sachs]

Okay, thanks. That's a good reference point for us. Just one last one from me. The margin decline in distribution, I know it's kind of a tough comp there, but I was wondering how much of that is cost related and outside the volatility and product prices versus how much of it was just driven by the volatility that we saw.

[Nick Stokes, EVP, Building Materials Distribution]

As you know and as we've talked many times on these calls, BMD's margins are a function of two primary drivers, the mix between commodity and general line and the higher margin that is associated with products other than commodities; and the commodity pricing trajectory. And so, the slight dip you saw was driven by the last third of the second quarter in terms of some of the negative headwinds on commodity pricing. As a general rule commodities carry a lower gross margin than the general line items in the EWP. So, where we were 3 percentage points plus higher as a percent of sales on commodities, that's probably the biggest thing on the 10 basis point decline second quarter to second quarter.

[Operator]

Our next comes from Chip Dillon with Vertical Research. Your line is now open.

[Salvator Tiano, Vertical Research Partners]

Salvator Tiano filling in for Chip. So my first question is on EWP pricing. And it seems like you got some pretty good realizations year-on-year and quarter-on-quarter. I was just wondering, are price increases going through better and faster than you were expecting in the past three to six months?

[Dan Hutchinson, EVP, Wood Products]

No, not really. It's just -- as you know, in this business it takes a while for them to get through, but this is about what we expected.

[Wayne Rancourt, EVP, CFO & Treasurer]

Yes, I think what you're seeing, Salvatore, is the impact of the price increases we announced in 2017 and some of the larger customers we have price protection. And so, some of the price protection related to the 2017 increases rolling off. And as well, we had price increases early in 2018. And so, for those you are seeing really a combination of the 2017 and the early 2018 price increases. And we would expect continued modest improvement on net prices as we move through the rest of the year.

[Salvator Tiano, Vertical Research Partners]

Sure, perfect. And if I can ask a follow-up on the building material distribution margins. You broke up how we can expect some scenarios similar to 2013 and I looked at margins were down I think 1% -- 1 percentage point sequentially granted -- and that was actually off I think a weak seasonally quarter one Q2. So I'm wondering, as we're looking here into the third quarter, firstly, what would be the second-quarter base -- well actually, let me rephrase. The 3.9% operating margin that we achieved this quarter was I think a record for the segment. So obviously we'll expect some margin pressure, as you mentioned, but off what base should we -- normalized base should we think that will be? Is the 3.9% achievable if you didn't see this continuous decline in the third quarter? Or is that something that was also benefiting from some one-offs from higher pricing and your traditional margin would be closer to last year's 3.5%?

[Wayne Rancourt, EVP, CFO & Treasurer]

Yes, I think what we have talked about the last couple quarters is Nick's business has benefited from the tailwinds of rising commodity prices. Some of that has shown up in gross margin. And obviously, based on the first six weeks, we think some of that tailwind will turn into a headwind. We have historically said that we think 3.5% -- 3.2% to 3.5% is probably a more normalized amount for EBITDA in that business. And part of what you're seeing in the last couple quarters has been pretty significant operating expense leverage because of the revenue build from commodity pricing. So as that trend reverses, I don't know that we will give up a lot in gross margins unless prices continue down as they have, in which case we will see gross margin compression. But obviously with the fall in OSB in particular and in dimension lumber prices, we will lose some top-line revenue that will negatively impact our expense leverage as we go into third quarter. And again, we think a more normalized margin for the distribution business is probably in the 3.5% range, but we are obviously trying to do better than that.

[Salvator Tiano, Vertical Research Partners]

Sure. And just one last one. You had two acquisitions completed in the quarter. Can you tell us a little bit how things were progressing there? Were you achieving any synergies? And if you could give us some figures in terms of what was their income or top-line contribution during the quarter?

[Nick Stokes, EVP, Building Materials Distribution]

We don't disclose the per-unit revenue or EBITDA. I would tell you operationally both the Lumberman's acquisition as well as the Norman acquisition are both going very well, very much in line with our expectations and being integrated into our overall system and we're very happy with those.

[Operator]

Our next comes from Mark Wilde with Bank of Montréal. Your line is now open.

[Mark Wilde, BMO Capital Markets]

Good morning, Tom. Good morning, Wayne. I wondered if we could start big picture on the housing market, Tom, and maybe get your read on how the market looks right now from both a starts and repair and remodeling perspective. It seems like some of the broader industry numbers on housing have actually been weaker in recent months.

[Tom Corrick, CEO]

We see the same statistics you see and I can't provide any more insight into the statistics than that. But I will tell you that as we talk to the builder customers that we have relationships with, they feel actually pretty bullish on the situation and they feel like -- we don't see any real underlying change in their expectations for the course of the year. So I still continue to feel pretty good about the prospects there.

On the repair and remodel side I have not heard anything that would indicate that we're seeing a reduction in the trends. I mean, you see typically this time of year with the weather things slow down a bit. That's just because people don't like working in 110 degree weather. But I really don't see anything underlying in our conversations that would indicate that things are slowing down. Nick or Dan, anything you would add to that?

[Mark Wilde, BMO Capital Markets]

All right for kind of a second question then, Tom, I wondered if you could talk a little bit more about the special dividend and about how this is fitting in with your whole strategy on capital allocation and how you want to manage the balance sheet.

[Tom Corrick, CEO]

Sure. I'm going to let Wayne jump in as well on that, Mark. I think we've been very consistent about how we have communicated this really since the IPO. And as you think about how we are going to deploy capital, our preference is always going to be to use it where we can to grow the business profitably to the benefit of the shareholders.

And so, I think that really the underlying thoughts about how we tackle that haven't changed. We are going to pursue organic growth where it makes sense. We are going to do the things we need to do from a base capital program to keep our assets competitive. We are going to continue to look at acquisitions and I think that Nick had the two acquisitions in the second quarter and we are in discussions on other opportunities right now.

I think we are continuing to actually make some progress in the distribution space as we look at underserved markets and not only focusing on infill opportunities, but looking at ways we can expand in existing markets to take advantage of additional growth opportunities. So as ever, Mark, we continue to look at those growth opportunities that we think will have a positive benefit for our shareholders.

In addition, Wayne and I continue to look at adjacent acquisitions in adjacent space. And frankly, I think as you see with the recent activities we've taken on the pension fund, we are going to strategically do things we need to do to really have our balance sheet in good shape.

But in the framework of that, and I think it's clear how we dealt with it in the second quarter, to the degree that those opportunities -- we have cash in excess of those opportunities, we are going to be very focused on how do we create value with that. And in this case we elected that the proper thing to do is to look at the additional dividend.

[Mark Wilde, BMO Capital Markets]

Okay, that's helpful. I wonder just two other things. One, is it possible to get some sense of the impact in the second quarter of both the higher OSB costs, the higher West Coast log costs? And then also any benefit from inventory gains in that rising price environment?

[Wayne Rancourt, EVP, CFO & Treasurer]

Yes, the general rule, Mark, this is Wayne -- the rising price environment wouldn't cause any inventory gains. It would only show up if we sold the product through. And as far as the cost pressures on West Coast logs and OSB, I think probably the two biggest factors, if you took price variance based on plywood and EWP -- I look at Dan here -- I think the number was somewhere around 55 million priced positive price variance and we got about half of that dropped to the bottom line on and EBITDA basis in wood.

And by far the two largest components in the negative cost variance were the logs in the Northwest and OSB. And logs were overwhelming the biggest chunk of that. And just to give you a sense; in the South/Southeast log costs on a delivered basis were flat and we were up 20% in the Northwest second quarter -- well, year-to-date 18 compared to year-to-date 2017. And we will see if log costs in the Northwest moderate now that dimension lumber prices have come off as much as they have, but that's clearly one of the biggest cost drivers we are fighting at the moment.

[Tom Corrick, CEO]

And Mark, I would add that even to the degree that log costs move down in response to declining product prices, that's a longer-term process because we all have purchased logs on contracts that have been purchased at higher price. So, that is a lagging process to have costs catch up with that.

[Mark Wilde, BMO Capital Markets]

Okay. All right, last one from me is just -- maybe this is for Nick Stokes, but when you see the velocity improve on the rails coming out of Western Canada as these guys catch up on the order backlogs, how much of an effect is that having on the market? If we go back to the first quarter, there was a lot of lumber sitting on the ground in Canada. It seems like those inventories are being drawn down now. What's the impact of that in the market?

[Nick Stokes, EVP, Building Materials Distribution]

Boy, that's a tough one to quantify with any metrics, Mark. I would tell you in our conversations again, both on the supply side and the customer side, I think the dynamic is as you kind of articulated. What happens is folks are used to getting a steady flow, and when they get caught up in terms of the supply chain that steady flow turns into a bit of an accumulation at the destination. And so to some degree they back off on the ordering. And I think to some degree it's had an impact on some of the price erosion on the commodity side as the supply chain has normalized. Is it 2%? Is it 25%? I don't know the answer to that. I think that varies by unique geography and varies by unique customer in terms of how they analyzed their behavior through that process. But it has had an impact for sure.

[Wayne Rancourt, EVP, CFO & Treasurer]

We typically get a slowdown in July and August because of the hot weather in the South. And I would tell you having Fourth of July fall on a Wednesday didn't help that this year. So that's why I think our view is as we get to cooler weather heading into September, we are likely to see a pickup in demand that should put us in better balance.

[Mark Wilde, BMO Capital Markets]

Okay, that's helpful. Good luck in the second half of the year, guys.

[Operator]

[Operator Instructions]. Our next comes from Steve Chercover with Davidson. Your line is now open.

[Steve Chercover, D.A. Davidson & Co.]

So, a question I guess on logs. Is the price of -- high price of Western logs that make the Western plywood market a little more resilient than it was in the Southeast? And -- well, I'll let you answer that one first.

[Dan Hutchinson, EVP, Wood Products]

I think obviously the manufacturers have to get their money back, so that probably has some impact on it. Also you've got pretty robust markets in the Southeast and you have less impact on the West Coast, the Brazilian wood coming in.

[Tom Corrick, CEO]

I would add also, Steve, that you have some major start-ups on the OSB side in the Southeast. And I think just the overall structural panel demand situation in the Southeast is less tight then we are seeing for our Doug Fir markets as well.

[Steve Chercover, D.A. Davidson & Co.]

Okay, and how does the relative cost of logs color your desire to expand your manufacturing footprint if indeed you'd like to grow it?

[Wayne Rancourt, EVP, CFO & Treasurer]

I would tell you -- you can kind of see that going back to 2013. As a company we've been pretty reliant on state and federal forests in the Pacific Northwest through history. And what we've tried to do over the last four to five years is tilt more on the manufacturing footprint to the US South and Southeast where it's more private forest and, frankly, where the stocking levels have gone up significantly because of the housing downturn and just the growth rate in the South.

So that's I think why you're not seeing a lot of the stumpage prices move in the South. There are still pretty good inventory levels and there's a lot of competing sellers. And we just felt like over time with two thirds of the housing starts east of the Mississippi River and private forest, etc., that was a better place to focus the capital.

And what we're really trying to do in the Pacific Northwest is manufacturer high-value product or where we can take advantage of a relatively isolated wood basket like Northeast Washington. But I think you can see us continue to deploy capital into the South/Southeast to make sure that our key veneer and EWP operations are low-cost before we get to the next downturn.

[Steve Chercover, D.A. Davidson & Co.]

And then with respect to the special dividend, I don't want to beat this too much, but you didn't use the word variable. So is it fair to say that every year it'll be viewed with a fresh set of lenses, as opposed to this is the beginning of something we should look forward to on an annual basis?

[Wayne Rancourt, EVP, CFO & Treasurer]

I would tell you we very purposely used the word additional. I view special dividend as somebody's got five operating divisions, they sold one and they are taking the proceeds and paying it out to shareholders. And it's clearly not that. And we didn't want to use variable because we don't think this is a formulate process. As Tom described, we've kind of got a waterfall internally including the current state of our balance sheet outlook for the operations, internal capital needs and what we're seeing on the acquisition front. And to the extent we conclude with the Board that it makes sense to deploy capital back to shareholders, we kind of view there's three avenues, our regular dividend; share repurchases; and this additional dividend.

And I think we will periodically evaluate that, but I would tell you that our very strong preference is to deploy the capital into growing the business. But again, I don't view this as special as that it's a onetime offer. And I also wouldn't tell you there's a periodic schedule that was going to hit with the regularity and do this. Our preference is to deploy capital in growing the business, but this is just one more revenue to get it to shareholders.

[Steve Chercover, D.A. Davidson & Co.]

Is there any -- with respect to potential acquisitions, whether it's the -- I think you used the word adjacent. I mean obviously there's $40 million of cash that won't be made there, but it doesn't limit what you can do or you could actually still borrow if something was big enough?

[Wayne Rancourt, EVP, CFO & Treasurer]

Yes, I mean to that point, I don't know if you saw, but we just got upgraded by Moody's and we are at BA1. So I think our feeling is with the undrawn bank capacity we have being one notch below investment grade, we feel like we've got ongoing access to the capital markets.

And frankly the adjacencies we've looked at over the last 12 to 18 months the private equity guys have been very, very competitive in that arena and we want to be thoughtful in terms of what we pay them make sure that it really is going to add value to our shareholders.

So I think we feel like we've got plenty of financial firepower to take advantage of acquisitions should they make sense for the shareholders. And with our cash balance at June going over $200 million we concluded with our Board that this made sense. But again, I wouldn't tell you that we're looking at it on a formulate basis. It's just one more tool in our toolkit.

[Tom Corrick, CEO]

And Steve, I would tell you that one of the clear issues that we spent a lot of time with the Board discussing was maintaining the flexibility to take advantage of the opportunities that we think will be available in the next downturn. So this is a balancing act and I want to -- I agree with Wayne. I don't see any sort of cadence to this as you think about the future.

[Steve Chercover, D.A. Davidson & Co.]

Okay, well, great quarter. It's good to see the market still make sure that no good deeds goes unpunished.

[Operator]

Our next comes from Dan Jacome with Sidoti & Company. Your line is now open.

[Dan Jacome, Sidoti & Company]

A quick question here, sorry if I missed it. What's driving the incrementally more cautious outlook on imports into second half? Thanks.

[Wayne Rancourt, EVP, CFO & Treasurer]

Well, I think we've had very tight structural panel markets up until now. And so, the Brazilian imports really became a rounding error in the grand scheme of things. And I think with the OSB markets selling off in the Southeast and plywood pricing coming down Brazil will be one more source of supply that adds pressure to the market when it's not as tight as it was. And if you look at the volumes they brought in in April/May/June ex the trucking strike in Brazil this slowed shipments for a week or two they've been coming in at around the 90,000 cubic meter rate the last couple months. And again, we think that could be added pressure in the second half depending where we go on OSB and where demand levels far as we get into September and October.

[Operator]

And I'm showing no further questions at this time. I'd like to turn the call back to Mr. Tom Corrick for any closing remarks.

[Tom Corrick, CEO]

Great. Thank you to everybody for attending the call today. I'm obviously very pleased with the performance we enjoyed in the second quarter. I do want to call out our operating divisions for what really was the best safety quarter we've had since we went through the private equity transition in 2004, really great operations in a lot of different ways.

I think the other thing that was notable about the quarter was the many ways that we actually deployed capital from a capital allocation perspective in pursuit of organic growth and maintaining the strategic advantages of some of our key assets and acquisitions in the BMD space. And fundamentally getting to a position where we've eliminated the liability, ongoing exposure to our liability in our pension and in returning cash to our shareholders. So, I think a really active and successful quarter and excited for what's coming ahead.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.