Wayne Rancourt - Executive Vice President, Chief Financial Officer and Treasurer Thomas Corrick - Chief Executive Officer Dan Hutchinson - Head of Wood Products Nick Stokes - Executive Vice President, Building Materials Distribution Operations

Brian Maguire - Goldman Sachs Chip Dillion - Vertical Research Partners George Staphos - Bank of America Merrill Lynch Mark Wilde - BMO Capital Markets Steven Chercover - D. A. Davidson & Co. Gerry Heffernan - Linde, Hansen & Co., LLC

Good morning. My name is Skyler, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Boise Cascade’s Fourth Quarter 2016 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.

Thank you, Skyler, good morning, everyone. I'd like to welcome you to Boise Cascade's fourth quarter 2016 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 of this presentation includes reconciliations from our GAAP net income to EBITDA and adjusted EBITDA. And now, I will turn the call over to Tom Corrick.

Thanks, Wayne. Good morning, everybody. Thank you for joining us on our earnings call today. I’m on Slide 3. Our fourth quarter sales of $919.5 billion were up 5% from the fourth quarter of 2015 as a result of growth in engineered Wood Products and our Distribution business. Our net income of $4.1 million included $3.1 million of net after tax gains from certain items impacting results which Wayne will describe in more detail. Wood Products reported a segment loss of $7.8 million in the quarter. The segment loss was larger than the $2.3 million loss reported in the fourth quarter 2015 as earnings for Wood Products were negatively impacted by lower I-joist pricing, higher OSB costs and the start-up losses at our Roxboro, North Carolina EWP facility. The business also had $4.4 million higher depreciation expense following the acquisition of the two engineered Wood Products facilities last year and the capital projects undertaken in 2016. Building Materials Distribution reported segment income of $15.4 million. BMD continues to capitalize on favorable demand trends to grow their revenues and earnings with sales up 9% and operating income up 2% from the year ago quarter. Wayne will walk 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’m on Slide 4. Wood Products sales in the fourth quarter, including sales to our Distribution segment, were $290 million down 1% from fourth quarter 2015. The decrease in sales was driven primarily by decreases in plywood and lumber sales volumes of 9% and 8% respectively and a decrease in I-joist sales prices of 3%. These decreases were offset partially by increases in sales volumes of LVL and I-joists of 25% and 7% respectively and an increase in lumber sales prices of 9%. As Tom mentioned, Wood Products reported a segment loss of $7.8 million in the fourth quarter. Reported EBITDA for the business was $7.7 million down from the $8.8 million of EBITDA reported in the year-ago quarter. We expect higher OSB input costs and start-up losses at Roxboro to be a drag on Wood Products earnings again in the first quarter. However, Wood Products is likely to show a sequential earnings improvement based on what they are seeing in the first two months of the current quarter. BMD sales in the quarter were $771 million up 9% from fourth quarter 2015. Sales volumes and sales prices increased 8% and 1% respectively. BMD reported segment income of $15.4 million or EBITDA of $19.1 million. This compares to $18.3 million of EBITDA on the prior year quarter. The increase was driven by revenue growth and higher gross profit dollars despite a lower gross profit percentage. We reported negative EBITDA of $10.2 million on our corporate segment in the fourth quarter. The increase was primarily due to higher pension expense and incentive compensation costs. Pension expense increased $4.5 million and included a $3.9 million non-cash settlement charges associated with the lump sum benefit payments that we made from our pension plan during the quarter. In addition, our fourth quarter results included after-tax debt extinguishment charges of $3 million as well as an $8.5 million income tax benefit primarily associated with the reversal of valuation allowance on foreign differed tax assets, net of other tax adjustments. Collectively, the pension settlement, debt extinguishment and income tax adjustment resulted in a net after-tax gain of $3.1 million or $0.08 a share impact on the quarter. I would also note that we had mark-to-market gains on our interest rates swaps in the fourth quarter. As a result, the reported net income was higher than the EBITDA results in the two core businesses would indicate. Turning to Slide 5, our fourth quarter sales volumes for LVL and I-joists were up 25% and 7% respectively compared with fourth quarter 2015. Increased EWP volumes were due primarily to increased penetration with existing customers, as they shifted additional business to us following our acquisition of the Thorsby in Roxboro, EWP locations last year. We are also benefiting from improved single family housing starts and strong execution on our integrated supply chain through our wholesale distribution operations. We had more difficulty recommissioning the first LVL press at our Roxboro, North Carolina, EWP facility in the fourth quarter than we would have anticipated during our last earnings call. We have recently made significant progress on addressing several mechanical and process related issues on the press. Our on-grade production percentage has improved substantially in the last few weeks and we are building finished goods inventory at the facility to support shipments commencing on a more routine basis in the second quarter. The difficulties with the LVL restart have delayed our plans for LVL planned I-joists production at the Roxboro mill. I-Joists shipments are continuing to be sourced from our Alexandria, Louisiana, EWP facility, where we have every efficient capacity and production available. The acquired Thorsby, Alabama, LVL facility is running very well and we continue to increase production at that allocation to take advantage of the freight synergies into the southeast markets. LVL net sales realizations in the fourth quarter were essentially flat with the prior year quarter, but down from third quarter 2016. I-joists sales realizations fell 3% from the year ago quarter and were also down sequentially. We have announced EWP price increases of 7% to 10% effective March 13. It typically takes several quarters for the full effect of the announced price increases to be reflected in our operating results given sales arrangements with some of our downstream channel partners. We would expect a modest positive sequential earnings impact from the announced price increase in the first quarter and a steady increase in EWP realizations as we move through the rest of the year. Turning to Slide 6, our fourth quarter plywood sales volume of Wood Products was 364 million feet down 36 million feet or 9% from fourth quarter of 2015. In 2016, we shifted more of our veneer production into our EWP products and reduced plywood production in response to market conditions. We will continue to adjust our plywood production levels based upon where we see demand levels and pricing for plywood. The $268 average net sales price in the fourth quarter was flat with 2015 fourth quarter. We have seen some strengthening of plywood pricing in the last few weeks after experiencing declining prices throughout the month of January. Average plywood prices for the first two months of the first quarter are about flat with where we were on pricing in fourth quarter. It’s one of the market at the moment, feels good, but we will be watching imports and domestic operating rates. Moving to Slide 7, BMD`s fourth quarter sales were $771 million up 9% from fourth quarter 2015. By product area, BMD sales of commodity products increased 8%, general line products increased 9%, and engineered Wood Products increased to 11%. The gross margin percentage for BMD in the fourth quarter was 11.7%, down from the elevated 12.2% reported in the fourth quarter 2015. However, higher sales in the fourth quarter 2016 drove operating expense leverage compared to the fourth quarter 2015, which offset the majority of the decline in the gross margin percentage. On Slide 8, we set out the key elements of our working capital. Company net working capital excluding cash, income tax items, current portion of debt and accrued interest decreased $30.8 million during the fourth quarter. Receivables and inventories declined in both businesses during the fourth quarter partially offset by a decrease in accounts payable. I would expect working capital levels to increase seasonally in the first quarter. 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. On Slide 9, we extinguish the remaining portion of our 2020 senior notes in November using the cash shown as restricted on our September balance sheet. We used an additional $30 million of cash to reduce one of our bank term loans during the fourth quarter, while preserving the underlying lending commitment. Absent acquisitions, we expect to manage our balance sheet toward our gross debt-to-EBITDA target of 2.5 times during the remainder of 2017. We ended the quarter with total available liquidity of $431 million which reflects cash on our balance sheet and availability under our committed bank lines. We repurchased 400,000 shares in the fourth quarter for $7.6 million or $19.09 a share. We have approximately 697,000 shares left on our original 2 million share repurchased authorization. As you know, we vary the pace of our share repurchases based upon our assessment of acquisition opportunities, our balance sheet leverage and our free cash flow generation. Our capital spending is expected to be between $75 million and $85 million in 2017 which is down modestly from the levels in 2016. Tom, I will turn the call back over to you to wrap up.

Okay. Thank you, Wayne. The February consensus estimate for 2017 U.S. housing starts is $1.26 million, up from $1.17 million in 2016. The growth is expected to come in single family construction which is more favorable for the demand for our products. We continue to believe the demographics in the U.S. will support a return to normalized housing starts of 1.4 million to 1.5 million starts. We have a number of areas within our control and Wood Products to drive better earnings in 2017. Much of the foundation was laid in 2016, but we still have work to do particularly in our eastern region. I continue to feel very good about the strategic direction of the Wood Products business. We have continued to grow our market position in EWP with additional manufacturing particularly in the eastern half of the country. We have increased our veneer self-sufficiency with our completed capital projects and we are able to move a higher proportion of that veneer into our engineered Wood Products as demand improves. Even without price increases, we should see improved financial performance from our Wood Products operations in 2017. BMD continues to execute very well against its market opportunities. Nick and his team have done a remarkable job of remaining nimble and responding to market opportunities at both the local and national level. The working relationship between our two businesses is driving market share gains in both EWP and in distribution. I would like to thank our employees, customers and suppliers for their work and support in 2016. I am optimistic for 2017 and believe that our position in the market place has never been stronger. Thank you again for joining us on our call this morning. We would welcome any questions at this time. Operator would you please open the phone lines.

[Operator Instructions] And our first question comes from Brian Maguire with Goldman Sachs. Your line is now open.

Good morning, guys. Thanks for taking my question. Glad to hear you announced some price increases in EWP. Does that imply that some of the channel shift that had been going on last year has kind of settled out now and we're kind of at the point where everyone has kind of partnered up and we feel like we've got a pretty stable base and environment to be trying to push through a price increase at this point?

Yes. I think that's true and we bought the GPS, that clearly caused some disruption in the system and I think a lot of that's been stabilized now.

Okay. Great. And then on input costs trends in general, obviously OSB was a bit of a headwind last year and maybe continues to be one in 2017. The pricing seems like it's partially trying to address that. But just other input cost trends in general, just wondering what you're seeing out there. I've been just hearing a lot from other companies about input costs going up. Just wondering how your particular set of inputs have trended.

Hi, Brian, this is Wayne. I think on the Wood Products side OSB is that the major issue at the moment if you look at where we are today on North Central compared to the same week of year ago it's up $80 so some were just north of 300 compared to 223. And we're really not lapped that until we get into late May, June and we have a trailing pricing formula on our OSB as an input costs. So I don't expect - even if OSB stayed flat with where it is today we wouldn't get to kind of a neutral situation on year-over-year comps until we go into the third quarter of this year and obviously always beside a very strong start to the year. So we'll see where we go from here, but that's probably the major issue. I don't see a lot of changes on ULEF resin, energy log cost, labor, settlements have been relatively muted. So it's really the OSB is the main input costs. And as you know on the Distribution side when we see product price runs like of occurred the last couple weeks and lumber in OSB and implied what it's usually positive from the Distribution business standpoint. As prices are escalating because they're buying and reselling based on current market. So if we have upward trends in commodity pricing it's generally a failed favorable tailwind for the Distribution business.

Okay. Great. Just one last one, if I could, just wondering about the acquisition pipeline and how that looks. I think getting more distribution opportunities for engineered wood products has been a priority, but just wondering if you could update us on your thoughts there.

Yes, we are continuing to spend a fair amount of time looking at things I would tell you that we’re running into some of those same challenges we’ve had historically which is next business has got an exceedingly good national footprint today there's a couple of markets we'd like to increase our penetration. But if you buy regional player we generally have overlap and synergies get balanced by this synergies and if the private equity realm has ready access to the leverage loan market and high yield they can be pretty competitive and in a lot of cases fairly aggressive from the price standpoint. So we're trying to be thoughtful about how we do that and that obviously one of the priorities for 2017 that we will be very thoughtful about how we make acquisitions and what we are willing to pay.

Brian, this is Tom Corrick. I would also add that you know I think as we're looking that potential acquisition targets this year our focus will really be on the Distribution side. We clearly have some places we need to fill in and the Wood Products side. We definitely want to get the assets we purchase in 2016 up to where we need to have them run going forward.

Okay. Great, thanks very much.

Thanks Brian.

And our next question comes from Chip Dillion with Vertical Research. Your line is now open.

Good morning.

Yes, good morning. I guess my first question is on the - you mentioned that there was a delay in the production of I-joists in Roxboro because of, I guess, the challenges you saw in the fourth quarter you didn't expect. How much of a delay should we expect? Can you give us sort of a range of maybe what you thought would be the conversion point and maybe how much longer it's going to take?

Yes, Chip, this is Dan Hutchinson. I think it's probably be three or four months delay from our regional estimates, but maybe six months delay from what - probably what we told you on the last call. I think one thing that we need to make sure people understand is that we are more than able to service all of those markets out of Alex today so there's it's not as if we're losing sales that simply the sales are coming from different manufacturing point.

So maybe another way to look at it is you might have thought you would have been started up by now, but now it looks like it's mid-year. Is that fair?

Sure, yes.

Okay. And then, just to make sure I heard Wayne right, your debt goal again at 2.5 times, that's not net debt to EBITDA, that's gross debt to EBITDA?

Correct.

Okay.

And then we would typically run somewhere between $80 and $100 million on balance of cash and then obviously will adjust that as our operating results continue to improve the amount of cash cushion we need to carry come down, but currently we're looking at gross debt-to-EBITDA targeted 2.5 and somewhere $80 to $100 million of balance sheet cash.

Okay. And I appreciate the help on the OSB. It looks like you guys, last year, I'm guessing, bought give or take 300 million square feet for the engineered wood business sort of interpolating from what your case says. And first of all, if you would verify that and then as you think about these price escalations, is it fair to say that you get - you do have some indexing to those price changes on a lagged basis that are above and beyond or different than the price increase you announced?

Well, let me help you on the OSB thing. So as a general rule, what we've guided people to is one square foot of OSB for each lineal foot of I-joists. So if you look at 2016, we did $226 million in I-joists, so I'd use that as a pretty good benchmark. And then the pricing mechanisms we have are basically rolling one quarter average that lags. So on the way up, we don't pay as much as market for a period of time and on the way down, we pay essentially above market. So it's designed to smooth out some of the week-to-week volatility. But as I say, I think if OSB stayed where it is today, we would have a negative compound input costs until we got into the third quarter of this year.

I got you. And so actually, this has nothing to do with your pricing, so in theory if OSB goes up, stays up, you pay a higher price. There's no built-in pricing offset to that until you make an actual price increase, like you announced you are doing on March 13. Is that fair?

Yes, our engineered wood products I would describe much more as a building product type pricing where it's less price, one or two changes to the year, very long-term relationships. To the earlier question, Brian had about channel moving around. Once you establish channel partners, pricing remains competitive, but it's not a week to week switch or month to month switch like you see on dimension lumber and OSB. That tend to be very sticky long-term relationships and input costs really aren't the driver, its demand fundamentals and particularly single family housing starts. And I think looking at what we expect for 2017 in our capacity utilization and those relationships we felt comfortable moving prices up and then response to the market so far has been very favorable.

Okay. That's good to hear. And then, lastly, just looking at wood costs, I know we had some hurricane issues and what issues in the fourth quarter - or at the beginning of the fourth quarter. Would you describe your wood sort of cost profile as looking pretty flat to maybe even down sequentially and not much change year-to-year, or am I missing something?

Chip, this is Dan. Are you talking about the manufacturing costs?

Yes. Just the raw wood cost, and I'm thinking more what it looks like today in the first quarter versus what it was in the fourth and maybe what it looks like today versus a year ago?

Yes. If you are speaking about log costs, they have been relatively stable and we’re not seeing a lot of pressure on the log cost at the moment.

Okay. That’s helpful. Thank you.

Thanks Chip.

Our next question comes from George Staphos with Bank of America. Your line is now open.

Thanks, everyone good morning. Thanks for the comments so far and congratulations on the progress in the year. I want to come back to Roxboro. Not that this is anything that we can really plug into a model, because obviously we don't get that line item detail, but it sounded like it was the LVL press that was giving you problems coming up, and I had always thought that the I-joist line would follow a couple quarters after you got the LVL press running, so I'm kind of curious why I-joist - it seems like it was delayed so long, since I thought that was always a second half phenomenon anyway at Roxboro. Can you correct or affirm any of that?

We have qualified a portion of the I-joists production at Roxboro, but that plant has been running on a very limited basis when we bought it and it was using a solid sun flange made out of lumber. And our intent is to convert that into an LVL flange, which requires very high quality LVL because of the actual flange is a smaller dimension. And so particularly on the eastern seaboard, its way more cost effective for us today to produce the I-joists at Alexandria and so we have qualified LVL and can certify an LVL flange, I-joists and Roxboro and we're putting in capital improvements to increase the quality to the standards that we have in the market because essentially want customers on the East Coast to be in different, getting LVL out of Thorsby, Roxboro and Alexandria and we want the I-joists obviously when we put it in the market to be of the same quality that customers are getting from Alexandria. So we don't want to find ourselves, essentially shipping, what is perceived in the market is a second quality product and running the risk that customers start to specify, which facility they were and want the I-joists to come from. So once we get the LVL press running where it should be in Roxboro then we will go in and certify with APA, the I-joists and start to ship Roxboro and get the freight synergies. But as I say right now that main focus is getting the 95% plus on grade production on the LVL line and then we'll start working through the I-joists conversion and certifications.

Hey, Tom. Good morning.

Good morning. Just as a note, I think that you know the critical issue is it really becomes a product mix issue and from an income generation perspective. To the degree we can get the LVL press up and don’t have the high line up. It basically means more I-joists and Alexandria and more LVL and Roxboro. But the income impact system-wide once we get that LVL press up is actually real good.

Okay. But to Wayne’s point the way you get there is by making the customers indifferent which allows you then to optimize the whole supply chain in the Southeast, which is why you did the deal in the first place?

Yes.

Okay. The CapEx recognizing it's down from last year, I think it's up $5 million from the last guidance commentary, again $5 million is not that big of a deal, but is that related to the issues at Roxboro just getting that over the hump or is it related to something else?

Frankly, it probably is picking the range, we're anticipating being about $10 million lower than we were last year. The other piece is we had a property acquisition that BMD is working on that we thought we would get closed in the fourth quarter that’s flopped over. It’s minor environmental cleanup issue that's going on before we take title, which I would expect either to be the end of the first quarter or early second quarter. And it's going to let us build out one of our New England locations and have a contiguous footprint with more records and more storage space, because we've had pretty good business growth in that particular market and right now we're working with two facilities that are about a mile and a half apart and we've got an opportunity to pick up the contiguous plan and we're working on it.

Okay. Thanks for that color Wayne. So this was not related really to the Roxboro and the capital assisted with it is on track.

Yes. It's just a timing issue of not getting the BMD related property acquisition in the 2016 time period versus flopping into early this year.

Okay. One question I had on the tax rate, and I don't want to get too into the weeds on the conference call, just because I know it's kind of hard to follow all of the numbers, but when I make the adjustments for the $8.5 million benefit that you had called out and also make adjustments for the tax benefit, if you will, you get from the pension lump sum payment and the debt extinguishment charge. I still wind up with a tax benefit on, if you will, a Boise operating basis for the quarter of around $2.4 million, which is how you get to the $0.03, call it, operating earnings figure. Did you specify on the call - if you did, I missed it. What drove that benefit in the quarter, other than we know fourth quarters can be noisy with lots of catch-up accruals and that sort of thing?

Yes. Let me work through the tax thing with the offline if you would because I have to get that one out of a substantial amount of brain damage. I would tell you - I would guide you to use, the book rate is somewhere around 36% or 37% and assume our cash taxes are going to be about 25% and I'd be happy to work through the other math with you George and we'll get, really gives our controller on the line, but it's a reasonably complicated.

Understood. You answered my last question or my next question. And then on payables and I'll turn over. In the quarter, if I saw on the slide deck. There was a fairly large reduction in payables, was that just normal fourth quarter noise if I saw it correctly or there is something else that we should carry forward or think about into 2017? Thank you.

Now it's just normal seasonality in terms of the amount of inventory buys we do and running the working capital levels - please me.

Okay, thanks. I'll turn it over. I'll be back.

Our next question comes from Mark Wilde with BMO Capital Markets. Your line is now open.

Good morning, Tom and Wayne.

Good morning.

I wondered, just to start out, could I go back to Roxboro one more time? If we take the fourth quarter as just sort of the base level, can you just help us think about first quarter, second-quarter, third quarter cadencing in terms of how much of a drag we might expect, completely separate from any kind of pricing?

Yes, this is Wayne. I would tell you a conscious probably $2.5 million, $3 million negative drag on EBITDA in fourth quarter. As we went through January is probably at a similar level the losses are declining as we're making more on great product and getting more volume through to essentially carry the fixed cost. So I would expect by late second quarter that that will be in a neutral. So if you compare where will be late second quarter compared to where we just came from in fourth quarter. It will be a meaningful improvement. And then as we get into the latter part of 2017 our intent is to start ramping up the second press in Roxboro that will be if everything goes as planned in position and ready to make certified product for first quarter of 2018 and our intent is to continue to pull the near from the adjacent plywood operations as we move through the latter part of 2017 and then the early 2018.

Okay. So if I just take a step back, I recall when you made the GP acquisition we talked about a mid-cycle or a normalized contribution from the GP business of about $40 million. Has there been any change to that view?

No and maybe just run through those components, inside the four walls of the two facilities we figured we'd be somewhere around $27 million and based on what we're seeing from Thorsby we feel very good about that number it's going to take a while to get there Roxboro but the contribution we were expecting from Thorsby I think we'll be seeing that in 2017. We also thought we would get great synergies of $6 million to $7 million I would tell you we're a little behind on that because a meaningful portion of that is going to be I-joist shipments at Roxboro and having those truck ship because obviously when ship by I-joist ship a lot of air. And so we are not going to freight synergies that we would have expected by shipped in the highs and the Dan’s point we're probably you know six months behind where ideally we would have been on the I-joist on the freight synergies. And then the last component is we thought we would get volume growth in business growth in the distribution business as a result of having the additional EWP capacity. And I would tell you I feel very good about that. I think we frankly got part of that already in 2016 and pretty confident that as we get through the balance of this year, that's going to show up in Nick's business and that component I'm not worried at all. I think the business when we've gotten 2016 and the whole channel ship and who are aligned with in the 2017 I feel very good about the volume growth we're going to have this year.

Okay. That’s helpful.

Mark, this is Tom. The thing I’d say about that is that if you think about the model. There are clearly some cost savings from transfer and production is but at the end of the day that think driver and return on that is going to be incremental EWP sales and 2016 we just had I think a tremendous amount of success in the market that has accelerated what we thought would happen in terms of sales of EWP. So all in all I feel very good about where we're at it.

Okay. Then Wayne or Tom, can you just recap for us again on the level of price increases that are sitting out there in LVL and I-joist, and then how we might think about the roll in as we move through 2017, because I know that there's always a lag?

Yes, I think on a 7 to 10 we announced I would expect that I mean just given some other things are going to pricing. You will see sequential improvement in our pricing the first quarter compared to fourth quarter kind of unrelated to price increase. Because we were chasing fourth quarter the volumes came up more than we thought they would and we ended up paying an accruing additional rebates in the fourth quarter which is part of the reason the price dropped as much as it did sequentially third to four and obviously is going to first quarter we won't have that that drag again. But and on the 7 to 10 I think typically we would see maybe a third of that show up in the quarter it gets announced another third of that show up in the second quarter after announcement and then the balance kind of settling in over the subsequent quarter. So I would probably sequentially absent mix changes in geographic location changes. The price increase itself I would expect 2% to 3% to show up and second quarter 2% to 3% show up in the third quarter in the balance later in the year.

Okay. All right. That's really helpful. Then I also wondered, you cited kind of higher incentive comp expense in 2016 and I was just kind of curious about what drove that, given the performance of wood products was off so much year to year?

Well, there's two fundamental things. Nick’s business had a phenomenal year and their incentive comp is driven around business level EBITDA at least short-term component, so that was higher than what we've had in prior year. And frankly the board reset targets in wood and so the incentives in wood were higher. The other thing that's non-cash, but it's still important and obviously we don't adjust stock comp out of our numbers when we report EBITDA, and the board made a decision on the long-term incentive program to go to three-year cliff vesting on our long-term incentives and did partial grants to fill the vesting periods in 2016 and 2017 and the way the accountants treat it, we got more reported book expense. If you look at the value delivered to the upper management team, the value didn't shift, but the accounting cost on our LTI went up and that's the transition issue of moving to the three-year cliff vesting. And if you want to talk offline, I can walk you through the mechanics, but it's potentially around the accounting treatment of the vesting schedule on the long-terms incentives moving at a three-year cliff.

Okay. All right. Anything kind of update you can give us on what you're seeing in terms of plywood imports? I noticed that the Brazilian real continues to strengthen, so I'm just curious as to whether you are seeing any relief at all there.

Yes, I would describe. We saw a pretty good relief through September in terms of the stuff that was exported. So I'll read just some numbers and I'll give you a sense. This is exports from Brazil toward the U.S. So in May of 2016, we hit the high point at 60 million cubic meters. It fell off through September down to a low of just below 26 million cubic meters, and October move back up to 28, November moved to 37, December moved to just short of 40, and in January it was back down a little bit to just under 35 million cubic meters. So I think as prices move up on plywood, if you take a $300 price against the currency of three, and kind of get 900 and if you take 250, 260 times four you're not that far off. So I think to the extent prices move up in the U.S. All things being equal, we would expect the Brazilians to push material this way and the same with the Chileans. But at least the January number, it's 24% of the Brazilian exports head into the U.S. compared to the full-year 2016 number where it was 28%. So at least in the near-term, we have some modest relief.

Yes, I would say that we're watching closely because with the recent increase in pricing in plywood, certainly the Brazilians are looking at that and I would suspect that respond at some point.

Okay. And Tom, just to be clear, it's really the Brazilians that you would be more exposed to because the Chileans play in a little different segment of the plywood market, is that right?

I think that’s fair, but to the degree that Chileans come in with more of their high quality production that does push some U.S. producers down the value chain. And so certainly the Brazilians have had a lot more impact from the Chileans though.

Okay. The last question I have is, is it possible to just talk a little bit about these fire code issues in I-joists, because we keep getting questions about it? How much of your business is actually exposed to that at the moment? And what kind of steps are you taking or can you take to mitigate?

Yes. So the fire issue is in several states, it started on the East Coast. It's moved to some other markets. Where it really is an issue in unfinished basements, and I think it's part of what influenced the growth in I-joists for the industry relative to what's going on in dimension, there is some impact on that. It's not a huge portion of our business, it's impacted as long as we can provide a solution and we've got a couple of different solutions that are available down channel for the builders we work with and the dealers. We've got products in market that work. They're not particularly cost effective, but they solve the marketing issue in the narrow spaces where we need to have a product. We are pretty far along on field testing solution that we think will be much more economic and frankly as a finance guy actually looks really good and I suspect that if over the next several weeks that continues to play out favorably. We think we will have one of the better solutions in the market. It will not be something that will end up being proprietary to us. I think others will be able to mimic it, but based on the work we've done in other solutions we've seen at least what we've seen on economics. We think we will have hopefully over the next several weeks the best solution, but it's not an overall needle mover in one direction or the other.

Yes. This is Dan. The way I think about it is and Wayne’s get it right. There are lots of solutions to this problem. There is a subset of builders that would like - what we call the one-step solution with an I-joist, so they can simply take an I-joist and install it the way they've always installed I-joist. I don't blame them. The problems you have with labor today that's probably the best thing to do. We and the competitors have provided, that has been a high cost solution for that one step if you will. And Wayne is right. I think we've got one now that we're testing in the market which is much more enjoyable from a cost perspective for us then the other alternatives out there. There are lots of solutions to those problems. I think Wayne is right. It's not killing the I-joist.

Yes. I mean we're far enough along that we’ve passed the burn test and we’re highly confident that works. This is more currently field testing with HVAC forming an electrical installers to see as you punch holes for the I-joist as you normally do to run utilities. Just making sure that product responds well and the guys in the field are able to handle it and assuming that goes well and we’ll have the product in the market probably by mid-year.

Okay. The cut through, the punch line on it, and it doesn't significantly change the economics of using an I-joist versus using solid sawn?

This is Tom. It's certainly more expensive to buy joist that has been treated for fire durability, but the marketplace has a price for that and people are willing to pay for it. The alternative is always simply the sheetrock, the basement ceiling, but what I would tell you is I-joists have always been more expensive than the dimension lumber per lineal foot because they have lots of features and capabilities that the dimension lumber doesn't have. And if anything I think this you know as people have maybe made the switch because the dimension was correspondingly proportionally cheaper if they were pursuing a fire solution with I-joists. What they're discovering is just what there's a reason we use I-joists when we build for systems, it's better product. I think the impact has been marginal in terms of overall demand for us. I think when you get at risk is if you don't have a good solution, you face the risk of losing EWP business to a competitor who does have a good solution.

Okay. That’s really helpful guys. Thanks very much. I’ll turn it over.

And our next question comes from Steve Chercover with Davidson. Your line is now open.

Thank you. Good morning, everyone.

Hey, Steve.

So I think I basically have one question for each segment, and I'll start with corporate, actually. The $5 million gain on the swap, was that incorporated solely into corporate and otherwise you would have had a negative $15 million EBITDA in the quarter?

Okay. No, it's not in the adjusted EBITDA number. It's essentially treated as an interest type issue. So it's not in the 10 negative for corporate. Now I mean if you think about it, when we do the segment incomes, we started operating income. So you are already above the interest and tax component and we have the debt extinguishment charges and the swap gains are essentially below the operating income line, so you're starting at a higher point on the income statement when you add back the DNA related corporate.

So the run rate of corporate EBIT, we’ll call it, is in that low-to-mid 20 range annually is what we…

Yes. I think historically we've guided to somewhere around 23-ish kind of number 22-ish kind of number. I would tell you given the way pension accounting works we're likely to have $1.5 or so extra pension expense just because we’re amortizing actuarial losses at this point. And the other thing we did for 2017 as we have yet again dropped our pension return assumption, so we're going to be using 5% this year. So what you're getting through the corporate line you may recall several years ago, we pulled our legacy pension cost out of the two business segments in terms that all incorporate because all we've got right now essentially is a fully frozen is just a question of funding level on what the expense number is. So that all runs through corporate and that's probably going to be up $1.5 million this year, mostly due to amortization of the actuarial losses not a cash number, but we don't add it back for EBITDA.

Okay. Thanks and then I guess you guys are corporate so you're important but even more important segments now. So starting with engineered wood and Tom alluded to this generally as I understand it gets easier and easier to convince builders or contractors to swap into EWP as lumber price is escalate and we sure have seen that last certainly last month. So are your order filed extending even stronger than you might have thought otherwise?

No, our order files are extending because we've issued a price increase and that's generally what happens. This is Dan. I don't know that it has I don't think the change in dimension lumber that's happened so recently is not much of an impact in the last few weeks over our sales of I-joists.

Yes. I would tell you from experience there is a point certainly where lumber prices Wood drive increase I-joists sales but it takes a pretty extended period of time with that relation to ship to exist because every house is dealt with I-joists you have to design the floor system with the CAD drawings systems. And so you're not going to see people just go and send out some I-joists because it has to go through the design process and they've got to decide they want to change the whole purchasing cycle that they're engaged. And so certainly lumber prices will impact that it will take some time to have that happen in that relationship is it's got all exist for a while Steve.

And then versus also mentioned lumber prices fall you're not going to see a lot of the builders immediately switch out of engineered wood go back to the demission.

Got it, so` any kind of acceleration on the engineered side right now is kind of pre-buying because of the price hike. So you kind of led me with a good lead in to the final question, which is the volatility of lumber prices and the implications for BMD, because I assume that when prices are going up substantially, like we've seen recently, you guys could see a pretty good inventory gain. But Random Lengths pointed out last week that in 2001 the big run-up was followed by a big reversal, so are you concerned one way or another how this might impact BMD?

Morning Steve, this is Nick. The answer to your question is yes. As we've previously talked about our margin it's driven by mix and to some degree the pace of change on the commodity pricing environment. And so certainly over the last six weeks, we've experienced some pretty significant price appreciation. But I think everyone understands that the appreciation component of that is not sustainable and it's a gas as to where the prices will settle and when the inflection point comes. But that's part of the regular process and I think we've got systems and processes in place to both take advantage of the upside and then deal with the mitigation on the down side. But it's been a pretty bumpy volatile ride and it feels pretty good at the moment but we know you just look at 2013 and you see the trajectory of what's possible sometimes.

Exactly. Okay. Thank you all very much.

Thanks Steve.

Thanks Steve.

Your next question comes from Gerry Heffernan with Linde, Hansen. Your line is now open.

Hello Gerry.

Good morning, Gerry.

Thank you very much for your time and your answers, all of my questions have been asked.

Okay. Thanks Gerry.

Thank you.

And we have a follow-up question from George Staphos with Bank of America. Your line is open.

Thanks. Hi, guys. Some housekeeping, although I think you covered this already. So pension expense, we should have $1.5 million pick-up or increase in expense non-cash this year versus 2016. Did I hear that correctly?

Yes, that's probably a reasonable estimate of the change.

Okay. And we can more or less - obviously barring any further M&A, we can more or less take the depreciation and amortization from the fourth quarter and annualize that and that should be a figure for 2017. Any reason that logic is incorrect?

That will be largely correct for 2017. I think as we get later in the year, depending on the pace of getting the second press recommissioned at Roxboro at some point we’ll initiate depreciation on those assets. But again that's probably a late third quarter, fourth quarter if everything went well, but obviously if we could get that in service from a tax standpoint before the end of the year, we would try to do that.

Okay. And then, there wasn't a comment, and maybe that in itself is the answer, but have you had - can you comment at all in terms of the increased plywood supply in the Southeast, whether it's had much effect, if any, in terms of recent trends for you or for the industry? Thanks, guys, and good luck in the quarter.

The ramp up on the plant that the private equity guys rebuild in Mississippi has been slower than we would have anticipated and certainly slower than they advertised their intent in third quarter. So we did not see a lot of volume in fourth quarter coming into the marketplace and that was true in January. I’ve been told that they - and again this is anecdotal, but they are currently doing somewhere around $1.6 million a week. I think when they put out announcements a year ago they said they thought they have about 400 million feet of capacity and they’re clearly running well below that at this point and it's had some market impact in the south, but it's pretty negligible at this point. We'll have to watch their ramp up and how they come through the rest of first quarter and into the balance of the first half of the year, but so far they're not having much of an impact on the market.

Okay. I appreciate the color. Thanks again guys.

Thank you.

[Operator Instructions] And our next question is from Mark Wilde of BMO Capital Markets. Your line is now open.

Yes. Just a couple of follow-ons. First, to come back to kind of your mid-cycle assumptions, I think if we go back six months to 12 months ago you were kind of pointing to mid-cycle of around 310. Is that still a good assumption in your view?

Yes, Mark. This is Wayne. I would tell you that on the BMD piece we had kind of indicated 125-ish based on the pickup from the GP acquisition on top of that 120 we've guided to before, and feel very good about that particularly given what we saw in 2016. On the wood side, the three components, if you said, hey build a bridge from 2016 to the number that would be in that 300, 310 kind of number, the three components we need in wood products to hit that. Our plywood margins being reestablished kind of at the $45 level on an EBITDA basis, margin improvement in EWP as we raise prices, and then the volume component on EWP, and based on the channel partners we have today and given the acquisition of the GP mills, if housing continues to recover that kind of a 6% to 8% increase in starts year-by-year. I'm highly confident we will hit the EWP volume component. If I can take prices over the last two weeks at plywood and hold them where they are, I'm pretty sure we would reestablish a plywood margin. We will see how this year plays out, as you know that's probably the most volatile component. And I would tell you based on the price increase announcement, we did on EWP that down channel receptivity in the behavior from others in the industry, I feel increasingly positive that this housing continues to move towards 14, 15. We're going to see the pricing improvements and margin improvements in EWP we anticipated. So again if I took plywood prices today and we would be kind of at what we thought we would need for margins in mid cycle and two weeks unfortunately does not make a year or two or three years. So we’ll see how that plays out, but frankly I think our behavior of shifting veneer into EWP ramping back our plywood production. Hopefully, we’re contributing in the market dynamics and then I think the OSB guys being out three to four weeks on order files is probably helping to get a little more plywood in the residential construction. So we feel okay about the tone, and again feel pretty good about the factors we control, coming into 2017 that it's probably going to be more of a second half story for us than a first half story.

Okay. And it sounds like probably plywood pricing ultimately is the biggest wild card in there.

Hope for sure.

Yes. Okay. The other question I had was just on the kind of capital deployment and acquisition front. It sounds like you're looking for just sort of some regional fill-ins in distribution, which you've talked about in the past, but, in addition, in the past you've also talked about the potential to maybe move some other product through the pipeline. Can you just update us on your thinking around growth and distribution, fill-ins versus maybe moving into some other products?

This is Tom. We continue to look hard. There's an awful lot of effort going into it. I think that we as we think about that issue, we would like to go someplace where we actually bring value and so typically that would either described as selling a product that we already sell to customers we don't currently know or selling products that our customers use every day that we could logically handle. And so that's kind of the space we're looking and there are not just thousands of opportunities out there and to the degree they'd be material, they're fairly infrequent. But there is a continuing effort to find those sorts of opportunities because we think we have a really good model around how we do distribution.

I think your performance in distribution over the long run would suggest that, Tom. So congratulations. Good luck in 2017.

Thanks Mark.

And we have a follow-up question from Chip Dillion with Vertical Research. Your line is now open.

Yes, hi. You mentioned that certainly the way it feels right now that your performance in Wood Products would be up sequentially. Is it fair to say, though that it would give the ongoing challenges in Roxboro that it would be unlikely that you would be able to get close to where you were a year ago in the first quarter, which I think was around 12?

Yes, segment EBITDA for wood in the first quarter 2016 was 17.5?

Yep.

And as you know we do not give details guidance. So let me answer it this way Chip. I feel very good about where we are in EWP volumes and price. And I feel okay about where we are in lumber prices. If you said okay, what are the negatives? I would say the negatives are where we eventually shake out on plywood price and I think we will be better than the 261 that we had a year ago in the first quarter. And the drag issues are going to be OSB Roxboro and to a lesser extent not huge, but residual pricing is down and that's one of the things we'll be watching in 2017 as there is some growth in the paper industry, but as the Wood Products business ramps up, one of the things that may become an issue is residual markets may become more challenging as we move through 2017 and 2018.

I see, okay. That's helpful. And then just to make sure I heard this right, you were saying I believe that the start-up process at Roxboro was $3 million to $4 million negative per quarter or was that for month you were saying?

It was probably about $2.5 million to 3 million negative in the fourth quarter and again I think I will get the neutral on Roxboro late second quarter and that obviously on a quarterly basis makes a big difference and Tom Corrick and Dan Hutchinson’s standpoint as we start to get incremental volume in EWP system then we really get the value from the acquisition because that extent we're just displacing what we're manufacturing at Alexandria and shipping at either out of Roxboro or Thorsby. You just trading off incremental plywood volume and where that value in the acquisition really kicks in it is where we get overall incremental volume across the three plants. Then the earnings leverage really starts to kick in, but if you're just placing orders that you could have produced that Alexandria, you just send up with incremental plywood.

And as we think about Alexandria and you mentioned that sort of the inside the wall benefit would be received or it should be achieved in 2017, is that about half the $27 million you mentioned or is it disproportionate?

Well, out of the $27 million that we thought we would get out of Thorsby and Roxboro. The Thorsby component, I think we'll see the majority of Thorsby half of the $27 million if you well in 2017. I think we’ll have good progress at Thorsby and we've got an incremental volume that I'm not worried about Thorsby displacing, Alex. Roxboro, it's going to be more of an 18 event before we see the full earnings power of Roxboro in the mix.

I got you. Yes, I meant Thorsby. So Roxboro and Thorsby are roughly ballpark eventually will be equal contributors?

Yes, I would suspect that's right because we’ll have LVL coming out of Roxboro and we will have I-joists coming out of there eventually.

Okay, great. Thank you.

At this time, I’m showing no further questions. I’d like to turn the call back over to Mr. Thomas Corrick for closing remarks.

Thank you. Skyler. Thanks to everybody for being on the call. I guess I'd like to emphasize that that the fourth quarter certainly experiencing challenges, but I think the directions good. There are many things under our control that I think as we continue to execute we’ll really begin to show up in the second half of the year and I finish up by saying that while we've had some challenges with our acquisition. I feel better than ever about undertaking it and I think it strategically is going to be a huge win for us going forward. Thanks for calling in today.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may now disconnect. Everyone have a great day.