Oct 24, 2016
Executives
Wayne Rancourt - EVP, CFO & Treasurer Tom Corrick - Chief Executive Officer Dan Hutchinson - Head of Wood Products Rich Viola - SVP of Sales and Marketing & Head of Building Material Distribution Operations
Analysts
Mark Wilde - BMO Capital Markets Brian Maguire - Goldman Sachs Steve Chercover - Davidson Chip Dillon - Vertical Research Partner George Staphos - Bank of America Merrill Lynch
Operator
Good morning. My name is Nova, and I will be your conference facilitator today.
At this time, I would like to welcome everyone to the Boise Cascade’s Third 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 matter 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 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
Thank you, Nove. Good morning everyone.
I'd like to welcome you to Boise Cascade's third quarter 2016 earnings call and business update. Joining me on today’s are Tom Corrick, our CEO; Dan Hutchinson, Head of our Wood Products Operations; and Rich Viola, Senior Vice President of Sales and Marketing for our Building Material Distribution Operations.
Turning to Slide 2, I would point out the information regarding our forward-looking statements. The appendix of the presentation includes reconciliations from our GAAP net income to EBITDA.
And with that, I will turn the call over to Tom Corrick.
Tom Corrick
Thanks, Wayne. Good morning everyone.
Thank you for joining us for our earnings call today. I’m on Slide 3.
Our third quarter sales of $1.07 billion were up 8% from third quarter 2015 as a result of growth in engineered Wood Products and our Distribution business. Our net income of $10 million was down 55% from the third quarter 2015 due to a 10.3 million decline in Wood Products operating income and a 9.5 million pretax loss from the extinguishment of debt.
Wood Products reported segment income of $11.6 million in the quarter or EBITDA of $27.2 million. Although, the team in Wood Products executed well the quarter, operating income declined $10.3 million with reduced plywood sales volume sharply higher OSB pricing impacting our I-joists input costs as well as higher depreciation associated with the recently acquired engineered Wood Products facilities.
Wood Products made good progress on integrating the acquired Thorsby operation and re-commissioning the Roxboro North Carolina EWP facility. Building Materials Distribution reported segment income of $26.4 million or EBITDA of $29.9 million.
BMD continues to capitalize on favorable demand trends to grow their revenue and earnings with operating income of 16% from the year ago quarter. Wayne will now walk through the financial results in more detail, and then I'll come back with a few more comments on the outlook before we take your questions.
Wayne Rancourt
Thank you, Tom. I’m on Slide 4.
Wood Products sales in the third quarter, including sales to our Distribution segment, were 341 million essentially flat with third quarter 2015. Increases in EWP sales volume were offset by declines in plywood and lumber sales volumes.
Product pricing was relatively flat across EWP, plywood and lumber. Wood Products reported EBITDA of 27.2 million, down from the 32.9 million reported in the year ago quarter, principally because of higher OSB costs used in the manufacture of I-joists as well as higher per unit conversion cost for plywood and lumber attributable to lower production volumes.
As a reminder, we used about 1 square foot of oriented strand board for each linear foot of I-joists we produced. Our OSB input costs increased 35% from third quarter 2015 or approximately 5 million in the quarter.
BMD’s sales in the quarter were 889 million, up 11% from third quarter 2015. Sales volumes were up 8% and pricing was up 3%.
BMD’s EBITDA increased 4.1 million from the comparative prior year quarter, driven primarily by revenue growth and operating expense leverage. The Corporate segment reported negative EBITDA of 6.4 million in the quarter, which was higher by 2.2 million than the 4.2 million reported in third quarter 2015, primarily due to higher incentive compensation cost, professional fees and pension expense.
Turning to Slide 5. Our third quarter plywood sales volume in Wood Products was 385 million feet, down 27 million feet or 7% from third quarter 2015.
The $288 average net sales price for the quarter was up $6 from 2015's third quarter. Of note, the 288 average was a $17 or 6% sequential improvement from the second quarter of this year.
We're modestly encouraged by reduced pace of Brazilian exports to the U.S. since May of this year.
However, the private equity backed plywood plant in Louisville, Mississippi has commenced operations, so we're cautious on our view of the plywood supply demand balance for the remainder of the year and into the first quarter of 2017. We plan to take our Chester, South Carolina plywood operation down for approximately one month beginning in late November to complete the rebuild of its boiler, which will be helpful in managing our plywood production to demand again in the fourth quarter.
However, the downtime is expected to adversely impact our per unit plywood manufacturing cost in the fourth quarter. Turning to Slide 6.
Our third quarter sales volumes for LVL and I-joists were up 17% and 8% respectively compared with third quarter 2015. We were able to produce and sell Boise Cascade branded LVL from the acquired Thorsby, Alabama location in the third quarter.
The Wood Products team also made significant progress in the quarter on re-commissioning the first of the two LVL pressers we expect to operate at the recently acquired Roxboro, North Caroline EWP facility. The Roxboro mill is expected to be producing on-quality LVL within the next week.
We plan to discontinue the manufacturing and sales of Georgia-Pacific branded EWP by the end of this year. As expected, we have retained a minority of the legacy GP engineered Wood Products customers as we rebrand the production of the Boise Cascade.
However, we believe we will more than offset these customer losses as we ramp up sales through our existing EWP customer base and newly targeted relationships in the eastern two thirds of the country. We expect to continue rebalancing EWP production between our Louisiana, Alabama and North Carolina EWP operations during the fourth quarter.
Our primary focus is on restoring operations at the Roxboro, North Carolina facility ahead of the 2017 building season, and capturing and freight synergies. EWP net sales realizations in third quarter were essentially flat with the prior year quarter, but down slightly from second quarter 2016.
Other than a small price increased in the Western U.S. earlier in 2016, we have seen no material price changes in EWP this year.
However, the realignment of EWP customers and shipping points will continue to impact reported pricing over the next few quarters. Those changes may have positive or negative impacts on reported net sales realizations for EWP given regional differences in pricing, freight costs and sales allowances.
Moving to Slide 7, BMD's third quarter sales were 889 million, up 11% from third quarter 2015. By product area, BMD's sales of commodity products increased 15%, general line products increased 7% and EWP increased 11%.
The gross margin percentage for BMD in third quarter was 12%, flat with third quarter 2015. Commodity prices were relatively stable during third quarter 2016.
On Slide 8, we set out the key elements of our working capital, company net working capital including tax items, current portion of debt and accrued interest decreased 32.4 million during the third quarter. Receivables and inventories declined in both businesses during the third quarter and we reported an increase in accrued liability.
As a reminder, this statistical information filed as Exhibit 99.2 for our 8-K has receivables inventory and accounts payable detail, broken down by segments for those interested. And now on Slide 9, we issued 350 million of eight year notes with a 5.625% interest rate in August and tendered for the 300 million of 6.375% notes we had outstanding.
A 184.5 million of the old notes were tendered and retired in the third quarter. The remaining 115.5 million of principal of the old notes will be repaid on November 1st together with accrued interest and early redemption premium.
We reported a 122.9 million of restricted cash at quarter end related to the deposit with the trustee for the old notes. Excluding the restricted cash, our cash increased 35.1 million during the third quarter.
We ended the quarter with total available liquidity of 486 million which reflects the increase in unrestricted cash and availability under our committed bank line. Our long-term debt was 467 million at September 30.
We expect to manage our balance sheet towards gross debt to EBITDA target of 2.5 times during the remainder of 2016 and in 2017. I would note our effective tax rate in the third quarter was 35.6%.
We would expect the full year tax rate to fall between 35 and 37%. And Tom, I'll turn it back over to you for wrap up comments.
Tom Corrick
Thanks, Wayne. The October consensus estimate for 2016 U.S.
housing starts has declined modestly to 1.18 million starts. We believe the housing recovery will continue in 2017, but the decline in pace of the recovery is something we are watching closely.
We continue to believe that demographics in the U.S. will support a return to normalized housing starts of 1.4 to 1.5 million starts.
Our third quarter results in Wood Products were disappointing while many of the elements impacting profitability in the business were driven by commodity pricing for OSP volume, OSP and plywood volume it was still a weaker result than we would expect to deliver at this point in the housing recovery. I expect fourth quarter OSP input cost to again pressure our reported earnings.
We are moving into the seasonally weakest time of the year for end product demand for EWP and plywood which will make our sales mix for veneer and cost leverage difficult. Additionally, we have plain capital work at our plywood plant in South Carolina and re-commissioning work at the Roxboro North Carolina EWP facility.
BMD continues to execute very well against the pricing environment and the market opportunity. Business activity in October is typically good for distribution and then becomes less more weather dependent as we get into November and December.
Last year, we had favorable weather conditions deep into the fourth quarter enjoyed a usually robust year end. We will see what the last 10 weeks bring this year.
I want to thank our employees for the efforts they have put forth this year. We have successfully worked through a number of key issues related to integrating the acquired EWP facilities.
I remained confident that we are on course to realize the benefits we described when we purchased the GP assets. We continue to grow our distribution business as well.
There is more work to do; however, I remained confident that the actions we are taking in Woods Products and BMD will leave us very well positioned going into the 2017 building season. Thank you again for joining us on the call this morning.
We will welcome any questions at this time. Nova, would you please open the phone lines.
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Mark Wilde of BMO Capital Markets.
Mark Wilde
I wanted to just start out, you talked about the, mentioned the Chester outage in the fourth quarter, is there any way to kind of quantify that?
Wayne Rancourt
Hi Mark, this is Wayne. I think on the cost side, while we've seen in similar situation is that can cost of the couple of million bucks in terms of the operating expense leverage.
And then the other thing that typically happens when we go down for that period of time is the maintenance guys will catch up on any differed maintenance. I am trying to gauge the earnings impact, the offset to that is any impact that held on pricing environment.
Because obviously, if we're taking that much production out in the South East, there will be some impact on pricing and it may be frankly the slow declines that would otherwise occur. But if you look at the earnings impact -- if had to ballpark right now, I am guessing that is a couple of million bucks.
Mark Wilde
Okay. All right.
That's helpful. And then, can you give us some sense of where you at in terms of the ramp up from the GP to facilities, and kind of what type of accretion we might be looking at for this year and then as we can move into next year?
Tom Corrick
Yes, I'll start and I'll let Dan chime in. As we said after the second quarter call, it's tough to sort out the results on Thorsby in Roxboro.
Roxboro is somebody easier because it's an island at this point. We've been hiring employees to restart the press and we've been shipping veneer, but at this point we haven't had any good quality product come off the line.
We've got the APA stamps, and we're going to be wrapping and shipping good products hopefully within the next week or two. So, we'll start to get some revenue, but Roxboro has basically been in a lost situation because we haven’t had good products and obviously we've had all the ramp up expenses.
On Thorsby, we shifted quite a few customers over from our Alexandria, Louisiana operation in the Thorsby to take advantage to the freight. So for example, a couple for large customers in Atlanta, we are shipping LVL out of Thorsby as opposed to Alexandria, and I think, we're saving about a buck to unit on freight going into Atlanta for example.
So, Thorsby is contributing very positively to the EBITDA at this point, and then the offset to that from an income standpoint in wood is the higher depreciation we picked to up.
Mark Wilde
And then, you mentioned that by the end of the year, you won't be doing anymore kind of GP branded product, so I am just kind of curious about sort of how that impacts results when you plays out the GP brand?
Tom Corrick
Yes, probably, the near-term impact the biggest negative on the GP side is the customer loss because there is a number of customers that have anticipated the brand switch and have moved in a couple of cases to our competitors. So, if you look at the volume changes from second quarter to third quarter, we did incrementally lose more customers in the third quarter than we did in the second quarter.
Essentially, all of the legacy GP customers hung in, in the second quarter and the majority even through the third quarter. As we go into fourth quarter, we are ramping up some new business we won.
So, frankly, it's a little tough to tell where the volumes come out. Right now, I think fourth quarter volumes will be seasonally, potentially a little bit better just because of the new business we're bringing on.
But we, east of the Mississippi, generally have a dual distribution strategy, and some of the independent wholesalers that we're dealing in with GP rightfully so figure they're going into the 2017 building season, we would focus on internal company distribution and our legacy independent wholesalers that we deal with. And it's really that transition, Mark, and third quarter we're losing the some of the independent wholesalers that used to deal with GP and ramping up the business through our existing independents and our company distribution and our downstream dealers.
And I think, we'll see positive results from that in fourth quarter, but more so as we get into the spring building season next year.
Mark Wilde
And then just a couple of other questions, one is, I noticed that the I-joists pricing was down, but I think you mentioned that some of that maybe just marketing into different regions and also sort of incremental freight costs. I wondered if you could just help us with that, it was down about 3% I think kind of quarter-to-quarter?
Wayne Rancourt
I would tell you. So, looking at quarterly price that's on our EWP, a lot of it's going to vary on what region or country we're selling into and the customer mix.
So, I would tend to trend the couple of quarters, as opposed to just looking at single quarter. And again, if we're heavier to mix in the given quarter to the large dealers or larger builders, you'll see the realizations come down and then there's certain regional markets where pricing is higher.
Tom Corrick
Mark, this is Tom. I would just add there that there's a lot of product mix issues that can roll into this customer mix issues.
And I think the real key there is that we've seen no material changes in pricing in the marketplace, frankly in either direction. So, I don't see anything other than just typical mix issues going on.
Mark Wilde
The last question I had is, just maybe if you could discuss kind of current priorities for capital, looks like CapEx is going to be coming down about 15 million next year. And I'm curious about sort of incremental investments in distribution or manufacturing either of acquisitions or organic?
Wayne Rancourt
I would take acquisitions outside. I mean obviously that tends to be more opportunistic although the emphasis right now is probably looking for acquisitions on the distribution side, because the woods side has got the transition issues with the GP facilities et cetera that they're focused on.
In terms of the capital on the woods side, the main thing that will keep it elevated in the first half of '17 is completing a couple of projects at Roxboro as we re-commission that mill and then we've got a press project that we're doing to increase the veneer throughput out of the Florien, Louisiana where we just completed the dryer project. And once we get through the first half of '17, I expect the capital in Wood Products to drop back down to a more normalized 50 million to 55 million range per year.
In Distribution, we're probably running at about 80 million a year, unless we have something on real-estate side where there's an opportunity to acquire adjacent properties and build out facilities. And then on Corporate maybe one or two, but the priority right now as I said, finish up the Roxboro re-commissioning, get the new press into Florien and then we'll be through particularly after this boiler project.
And in Chester, we'll be through most of the major projects in Wood Products and will be more of maintenance capital going forward in the back half of '17 and into '18. And as I say acquisitions trying to focus on distribution at the moment.
Operator
Thank you. Our next question comes from the line of Brian Maguire of Goldman Sachs.
Brian Maguire
Sort of question on the volumes, you've pointed out that single family started through up pretty nicely this year. I think you're on volumes of kind of, in Wood Products at least of lag particularly plywood and lumber.
Just wondered if you could comment on what you're kind of seeing out there, is it really all-in impact from imports taking market share from you guys or is there more two within that? Thanks.
Tom Corrick
Well, let's start on the plywood side. There's probably about 20% maybe 25% of plywood that ends up in new residential construction at this point.
And the volumes, if you look at the total consumption data for Wood Products across the industry, plywood demand is actually okay. But we've been trying to reduce volumes particularly in light of the imports and where pricing was certainly through the beginning of the third quarter, and trying to make sure that we focus our veneer where we've got positive contribution and redirect more of that internally towards EWP production.
On the lumber sales volume, the lumber we produce is really used either by the guys they're making wood windows or doors or going into home centerboard programs. We don't do very much on the dimension lumber size that all we've got a little bit of size that we produce, but it's mostly focused on downstream re-manufacturing.
And again where pricing has been weak, we have been taking capacity out to try to balance the market and make sure that we're focusing on only running those assets that are generating positive cash flow.
Brian Maguire
All right. Great.
Maybe a kind of follow onto that, can you talk about where the operating rates are on plywood capacity right now and you mentioned maybe some downtime in the fourth quarter. You guys at the point we're thinking about mothballing or taking a more serious look at how much capacity you need at this point?
Tom Corrick
We have been running, I would tell you the industry I think is probably running at about the mid 80s in North America, down from the low 90s, principally because of imports out of South America. In terms of our capacity utilization, we have taken a modest amount of downtime through the system, but most of it has been redirecting traffic of the veneer into our engineered wood.
So, we're still running our facilities fairly full at this point, and the Chester outage is really related to maintenance capital more so than market related downtime, and at this point, we don't have any plan of currently curtailing any facilities.
Dan Hutchinson
If you think about our assets as opposed to some others in the plywood sector, almost all of them are linked to engineered Wood Products. So, we, as Wayne says, we see that market opportunity continue to grow, and our percentage of it continues to grow.
So we're using those assets and much of the veneer that's generated to support our engineered Wood Products facility.
Brian Maguire
Sorry, I was going to ask one more on the impact of Roxboro in the quarter. I think you mentioned maybe for 4Q that Chester would be a couple of million dollar hit for a month outages, is that about the size of the kind of losses that you're incurring on Roxboro now, as you get that plant to the state where it can start generating some revenue?
Tom Corrick
Yes, Roxboro I probably wouldn't quantify the losses because I think a lot of it dependent on what we see for volumes in November and December as we get to the start up; and there's two components, we're going to be moving closer I think in the next several months to an EBITDA breakeven at Roxboro. I mean obviously, we've got certainly last couple of months reasonably significant EBITDA losses at Roxboro less than a million bucks a month, but losses as we've hired people and then churning through veneer qualifying production on the LVL.
The other thing is, we've restarted depreciation on the LVL press assets as we re-commissioned. So, Roxboro and Thorsby both carry fairly heavy depreciation following the acquisition, so a lot of the elevated depreciation just in our Wood Products business is a result of that, that acquisition and spending.
So, if you that on in earnings before tax basis in Wood Products, Roxboro would be negative even once we go EBITDA positive.
Dan Hutchinson
Yes, this is Dan. We're going to start selling LVL in the fourth quarter right up there and using that LVL also that we're manufacturing on the press; we've rebuilt make I-joists, Boise I-joists.
So, really probably, we'll not start selling the Boise I-Joists until the first quarter. And so the combination of those two things will get us to a profitable position.
Operator
Your next question comes from the line of Steve Chercover of Davidson. Your line is open.
Steve Chercover
So, we've already talked a little bit about the impact of both Thorsby and Roxboro, so I guess I'll keep moving along. But how do you expect your inventories will be given the downtime at the end of the year, should you be exiting 2016 pretty tight?
Dan Hutchinson
Our inventories of engineered Wood Products, we always have a tendency to work those down in the fourth quarter, but making sure we have enough to take care of it in the first and second quarter of the new year which always starts off fairly strong, we will.
Tom Corrick
We'll take some volume out of inventories.
Steve Chercover
Good. It was one -- sorry, go ahead.
Tom Corrick
Just on plywood, we cannot run from an inventory position.
Steve Chercover
Okay. And then I wanted to get a sense of the proper run rate depreciation once everything's up and running.
So would $16 million per quarter be about right?
Tom Corrick
I think it's going to be about with that. Are you talking total company or just wood?
Steve Chercover
Just wood.
Tom Corrick
Yes, from 16, it's probably good for wood and then I'd say on a quarterly basis we are about 3.5 on BMD.
Steve Chercover
Got it. And then, finally, can you remind us where the repo authorization is?
As I recall, I think the last report said you had about 1.1 million left on the repo?
Tom Corrick
Yes, we’ve got 1.1 million remaining on the authorization at this point.
Steve Chercover
And do you think between the projects that you’re undertaking and there is refi you’ve got plenty of dry powder?
Tom Corrick
Yes, I think we’re going to have a Board meeting in the next couple of days. I think, if you were looking at capital allocation priorities, I mean obviously getting through this spending on Roxboro and Florien is high list.
Looking at opportunities and distributions, the part of the reason we extended the maturity on the notes is to give us the flexibility in terms of maturity schedule. We do want to work the debt level down towards 2.5 on a ratio to EBITDA, we'd much rather do that by growing the EBITDA than bringing the debt out.
But again, we have flexibility given our cash position liquidity position to bring the debt down, but we will no doubt to have a conversation with the Board again about remaining open on opportunistically repurchasing shares and working down at 1.1 million, because I think we’ve got the flexibility on the balance sheet and certainly on the maturity schedule to do that properly if the opportunities are there.
Steve Chercover
Yes, I don't want to put words in your mouth, but I believe the repo thus far is at around 29 million. And with that flexibility in your statement that you are feeling cautiously optimistic about 2017 I'm sure it will be nice to see a statement on that front?
Okay. Thank you both.
Dan Hutchinson
Thanks, Steve.
Tom Corrick
Thanks, Steve.
Operator
Thank you. Our next question comes from the line of Chip Dillon of Vertical Research Partner.
Chip Dillon
First question is, and I probably just missed this, on the Thorsby plant you mentioned that Roxboro you'd start I think you said selling LVL out of there and under the Boise brand next year. What is the similar situation or status of Thorsby?
Are you actually selling out of there now or when will you?
Dan Hutchinson
Chip, this is Dan. We have been selling LVL out of Throsby for some time now.
At first obviously, it was a mix of the GP legacy with customers with brand and the Boise brand. But today, it’s almost exclusively Boise brand as we start to continue to phase out that legacy brand.
From Roxboro, we will start to sell a small amount of LVL in the fourth quarter of this year from that facility, as we’ve been -- as Wayne said, we’ve been manufacturing the product for a month or so. We just haven't it up to quality specs yet.
Chip Dillon
Got you. And I noticed in the statement you all, it seems to imply that as we get into the second and certainly third quarter next year, that you expect to have if not running on all cylinders, all of the whether it's the new dryers at the existing plants or these two you acquired, you should be running fully or mostly fully and these things should be contributing by certainly the third quarter if not the second.
Is that fair?
Wayne Rancourt
Our current plan is to have obviously the new dyer with Florien up and running well before then, to have Throsby running obviously depending on market conditions full, and to have the assets at Roxboro capable of running. And again, it depends on market conditions, the only asset at Roxboro that we do not have plans to run right now is the green in.
We'll ship veneer into Roxboro from other facility.
Tom Corrick
Yes, Chip, one of the issues and one of the reasons we ended up buying the GP facilities is, we wanted to have excess capacity in the Eastern two thirds of the countries. So, if you looked at our operating rates across our Alexandria, Louisiana Thorsby and Roxboro facilities, we will not be running them full by any means in '17.
What we're trying to do -- make sure that we can support our customers as we get back to 1.5 million housing starts. So, we're rebalancing really between Alabama, North Carolina, and Louisiana based on customer location and freight and operating efficiencies.
So, we'll take the operating rate up in Alabama and certainly the first press will run full at Roxboro. We'll have the second press that we'll re-commission at Roxboro, but I wouldn't expect Roxboro to run full until we get into '18.
Chip Dillon
And then question -- a lot of that will depend on the housings level, I understand that.
Wayne Rancourt
Chip, at the highest levels though I would say, your core statement is correct which is that we expect that come the building season next year that these assets will be contributing significantly and positively to our performance so.
Chip Dillon
And then if you could talk a little bit about the building products distribution business. You know, your sales are growing nicely and I guess if you could just differentiate between mix in price and volumes and do you think you are taking share because of your balance sheet and maybe some struggles some others are having?
And then as you talk about it, the margins are up nicely, although the third-quarter improvement was less than what we saw in the first part of the year and I didn't know if we had -- I mean, you certainly deserve kudos for how you brought those up but is there more to come?
Wayne Rancourt
I would tell you on the distribution business, we do think we're gaining ground from a market share standpoint. That business is probably today 70% driven by new construction and 30% driven by what goes on in repair and remodel, and piece of that comes through the home center channel.
And feel very good about the trajectory going into next year, we've got one of our Southeastern locations, for example EWP volume compared to a year ago has doubled, and principally because of some customer shifts that occurred after we purchased the two EWP mills from GP. So, if you think about the downstream impact for distribution and ability to grow in the Midwest and in the Northeast and frankly in the South and Southeast, we've got a lot more latitude in growing distribution, not that we've got the GP EWP assets, and we're seeing pretty good customer receptivity which is having a positive impact on distribution.
But so far we haven't seen any huge shift in the overall business mix, so to the extent we're getting incremental EWP volumes, we're also pulling commodity business with that, and in other general line business which was part of the synergies we thought we would get out of the GP transaction that was about 6 million positive benefit to the distribution business. As far as the gross margin, I think we flagged on the last call that the 12.5% we had in Q2 was the benefit of some commodity price tailwinds.
So, we're 12% year-to-date, if you go back and look prior years, we were in '14 full year gross margins in that business were 11.4%, '15 we were 11.6%. And as you noted the 12%, we had third quarter this year with debt on the 12% last year.
So, I think if you're looking at the business, we still think somewhere in the mid 11% range is the right way to think about gross margins in that business. And as we get revenue gains, we think we're going to drop about 4% to 4.5% down to the EBITDA line on the incremental revenues.
Chip Dillon
And you mentioned 70% and 30% of the mix was: repair-remodeling, 70%, 30%, home center did I hear that right?
Wayne Rancourt
70%, I would attribute to new construction.
Chip Dillon
New construction.
Wayne Rancourt
Yes, whether that's single family or multi-family, and we're pushing obviously to get a bigger presence in multi-family. And I think about the 30% of the business is repair and remodel, and industrial and other things.
So, if you're trying to weigh the sales growth, as I said, use 70ish percent against whatever your assumption is on housing starts, and the 30% I'd probably weigh it based on R&R and maybe look at same-store sales through the big boxes and proxy.
Chip Dillon
And just maybe obvious but would you -- you mentioned the $5 million impact of the higher OSB costs in your EWP business, and without essentially any pricing offset, I guess it's fair to say that allow your competition to mix their own OSB I guess not choosing to pass on that in their transfer pricing or would you ascribe that to other issues?
Wayne Rancourt
Well, EWP as you know trades more like a lot of other building products where it's a list price and the pricing doesn't move very often, it is not traded historically like the commodity Wood Products where we see daily or weekly price fluctuations. And if I think about 2016, our competitors have the benefit of lower veneer input costs to the extent they're not vertically integrated on veneer.
And as you said, they manufacture OSP internally. In our case, we manufacture a lot of veneer internally and are basically vertically integrated on veneer and exposed to OSP and to a lesser extent strength-rated lumber for our New Brunswick operation in the legacy GP operation at Roxboro.
So, again, we're looking at pricing in EWP being driven by what we're seeing on supply and demand factors and that will change independent of the input costs.
Chip Dillon
Got you, and last quickly, I'm not asking you to predict earnings or anything, but would it surprise you if you did better than breakeven on an EPS basis from operations in the fourth quarter? Or is that something that you would think is not a given but something that you feel pretty comfortable with?
Wayne Rancourt
Well, if you listen to tone of this script and if you read our earnings release, I would describe it this way, the BMD had a very good fourth quarter last year, and this year I would say look at the weather in November and December, and I realize you're going to put our estimates out in the next couple of days. Put some Kentucky windows on the 18 million that we had a year ago and don't get too far ahead of yourself, because last year we had the benefit of very good weather and that got us to some higher rebate tiers.
So, I'm not necessarily looking to repeat the 12.2% that we have for gross margins for last year. I'd be surprised if we had that this year.
Dan Hutchinson
And in Wood Product, if you look at the lower volumes in plywood where we're expecting an LVL and the cost input pressures on OSP, I'm not looking for a fourth quarter that's going to be dramatically better than the fourth quarter reported a year ago. And again, if we get good weather in the building season that falls we get some higher volumes than we expect, that would be a positive but there's a lot of positives and negatives that could come through in the fourth quarter for wood, but I'm not expecting the meaningfully better than we were in the fourth quarter a year ago, just given the transition costs we've got going at Roxboro and what we've got with the Chester downtime and the OSP input costs.
Tom Corrick
I would note, as well, Chip, that if you and this is, if you look at Random Lengths where pricing last week is basically about the same on plywood as it was in the first quarter of 2016.
Operator
[Operator Instructions] Our next question comes from the line of George Staphos of BoA Merrill Lynch. Your line is open.
George Staphos
Thanks, hi guys, good morning, thanks for all the details as always. I want to come back first to Roxboro, so how important is getting the veneer end up and running in Roxboro to your overall profit projections internally obviously for 2017?
And can you remind us you know as you add more production at Alexandria you get the dyers up and running, you ultimately get the green end up at Roxboro and you in total the benefit, -- I think the EBITDA you targeted for the business you know that you acquired is something in the 40 range. What kind of housing starts requirement do you need to get to that?
Clearly it's not, at least in your expectation it would not sound like, in 2017.
Wayne Rancourt
George, this is Wayne. Let me start with your last comment first.
The 40 million is assuming we're at a 1.5 million housing starts. And to break it down, we assume that we would get about 28 million inside the two facilities.
We'd be about 6 to 7 million in freight and logistics savings by being able to ship out Alabama and North Carolina, and redirection and some Louisiana. And there's about 6 million of benefit to distribution.
On the green end at Roxboro, I would be surprised that if we restart that in '17, given the current conditions in the plywood market, and given our approach to try to start that mill back up kind of machine center by machine center and being able to hire at a logical pace and frankly work through a capital or logical pace. We are now pushing hard to restart the green end.
And one of the reasons as we have the adjacent plywood mill in Moncure, North Carolina and Chester, South Carolina, so what we will be doing certainly through 2017 is internalizing more of the veneer out of Chester and Moncure into Roxboro. So, it allows to us to hold off from capital spending with re-commissioning the green end, that allow us to be more top in terms of the pace of hiring people.
And frankly given that contribution on veneer going in EWP versus plywood, we think economically that the better decision for '17, and as we get into late '17 and see where we are and how things start in demand, and see where we are on plywood pricing we can re-visited. And then in the near term, we have ramped down LVL production modestly at Alexandria and pushed more Alexandria, Louisiana, EWP and pushed more of those into Thorsby.
And the consequence of that is potentially more plywood production at the neighboring plywood plant at Florien, Louisiana and Oakdale. But again, we're going to be looking at market conditions and making decisions around operating rates as we go through the '17.
George Staphos
You said Oakdale, and what was the other mill you were going to do potentially more plywood then?
Wayne Rancourt
Oakdale, Louisiana and Florien, Louisiana are the two that are adjacent to Alexandria and provide veneer into Alex. So to the extent, Alexandria runs at a slower rate we would end up making more plywood at Florien and Oakdale.
George Staphos
That makes sense. On the green end, not to belabor it, I kind of remember that you at one point in time had expected to restart in 2017.
Is that incorrect or is that dialing it back a little bit just based on what you are seeing on housing? And, Tom, not that you changed much in terms of your script on housing but are you -- you said watch closely what you are seeing, what we are seeing in terms of single-family starts.
Has anything gotten you a little bit more disconcerted in terms of the pace there?
Tom Corrick
I think, George, probably the biggest issue is, if you just look at rate of change in '15 versus the rate of change in '16, while we had single family move reasonably well, we certainly thought we'd have a stronger '16 than we actually had. And the question is, does it continue to, next year would be 60,000 starts versus 80,000.
So I think that's you really what we need to watch is a by telling, and it's still as we talk to people in the field, it still feels very good. The conversation is very positive, but obviously the growth has been a little bit slower than we hoped and expected.
George Staphos
And on veneer in Roxboro is that dialed back because of that or it was always an 2018 phenomenon?
Tom Corrick
Partially, as we looked at our alternatives, as we bought the mills, certainly a part of it was where would, Moncure, be at making profitability be at making plywood. And given where hardwood and plywood prices have gone for us at that mill, it makes a lot more sense to run that mill to EWP veneer which then internally reduces to need for out of Roxboro.
And I think allowed us pretty logically to delay that, and frankly improve overall earnings as a result.
George Staphos
Okay, that makes perfect sense. I appreciate that.
Periodically, the question comes up on the benefits of having an integrated model between Wood Products and Distribution. And so I guess the flipside of the coin could be you know what would be the advantages if you see any over time from splitting those businesses?
The last time you looked at it and to the extent that you can comment, how would you answer that question? Then I had a couple of follow-ons, as well.
Wayne Rancourt
Yes, I think our view right now on the integration is that a pretty key element in terms of their earnings power of the Company. If you look at our growth rates on market share and wholesale distribution and on engineered wood, having those two joined at the hip has really been driving the growth for both businesses and being able to present one face and do joint meetings on a customer level and feedback.
If you looked at our EWP sales 65% to 70% of the domestic sales go through of our internal distribution, and where we have independent wholesalers, they’re people that have been hanging around since, in most cases, 1999. We really haven't added any new independent wholesalers, so we feel really good about our access to market.
And if you look at what the two businesses have been able to accomplish, this year on plywood, and moving incremental plywood through the distribution business, having the two joined at the hip, we think adds significant value. I think part of your question is around separating the two businesses, I think the only thing that would in our minds drive the separation of the two businesses is if you had strategic acquirer for essentially both halves of the Company, and there were significant synergies would overcome the synergies we see between the two businesses composed as they are.
And again, we continue to evaluate that, but splitting the Company in half really from an operating standpoint, we would lose significant operating synergies, if they ran in two separate legal entities.
Tom Corrick
George to add to Wayne's answer, a couple of things, first half if you look at Wood Products, two primary product lines there, EWP and plywood. Both are products that need to go through distribution.
They are in general not going to ship direct to dealers, the need for wholesale distribution forward. And if you look at the companies that have overtime deemphasized their internal wholesale distribution system, you've seen some pretty dramatic declines in market share and EWP, simultaneously with that, our reduction and focus in distribution, And so, we see some very substantial operating synergies for both to our plywood business and our EWP business by having the two businesses connected.
George Staphos
No clearly, and if anything some of the peers that you mentioned seem to be going the other way. So that would support your point but periodically, again, the question comes up from the buy side.
So, I think it was good to talk about it here. Two last questions that I've got and I will turn it over.
Clearly the ramp in growth in the Brazilian imports has slowed, but I think there was a little bit of a tick up in August. Is that noise at this juncture?
It sounds like it based on your comments that you are a bit more worried about the domestic increase in capacity. And then back to cash flow, when we're in a ramp period as we have been hopefully in terms of the housing complex, your business doesn't really generate a heck of a lot of cash flow because of the need to feed distribution.
When do you see the business getting to a point where you will have excess cash flow beyond what you need to recapitalize facilities, take down debt, etc., to be able to buy back stock at a more aggressive pace assuming valuation was appropriate? Is that a '17 phenomenon?
Or do you really have to get to '18 and hopefully 1.4 million, 1.5 million starts versus see materially the free cash flow levels go up? Thank you, guys.
Wayne Rancourt
George, let me take a shot at this. On the first one on Brazil, the data I have and these are in million cubic meters.
For May, it was into the U.S. or targeted out of -- exports out of Brazil.
Towards the U.S., it was 60 million cubic meters in May, 54 in June, dropped to 51 in July, dropped further to 47 in August.
George Staphos
We will check our August numbers because we had a little bit of a tick-up after the peak in May.
Wayne Rancourt
And fell to 26 in September. And this is measuring as exports out of Brazil targeted to the U.S.
As far as free cash, as I said, when we look forward at our EBITDA we're not that concerned about our debt level, but again we want to make sure we get back towards the 2.5 times. BMD is throwing off even today, remember again free cash flow given their EBITDA and given how well they've managed the working capital and where their capital is.
And again, I think as we look at EBITDA for Wood Products next year, if we continue to have high OSB and low plywood prices, that's going to be a challenge where we'll likely see benefits as higher EWP volumes. And if market conditions remain as they are likely higher EWP prices and to the extent we can reduce capital spending more normalized levels than wood products, we'll start generating significant free cash flow out of that business as well.
And as long as we get our debt levels down towards that 2.5 times, I think you'll absent acquisitions to pace up the share repurchases tick up. But again, it'll be dependent on share price and what we see as opportunities in the acquisition arena.
But in terms of the free cash flow that we've able to deploy, I would expect that to be meaningfully better in '17, than it was this year.
George Staphos
That's great. Wayne, I appreciate it.
Go ahead, Tom.
Tom Corrick
I would add their George that we're ramping back down to what I consider base capital spending and until we see a really substantial increase in our free cash flow I see us being pretty disciplined about how we manage CapEx other than potential acquisition. So, we're focused on that issue pretty intensely.
Operator
Thank you. And we have a follow up question from the line of Mark Wilde of BMO Capital Markets.
Your line is open.
Mark Wilde
Thanks. Just one follow-on, I noticed in the release that you had an increase that you called out in incentive comp and professional fees and I wondered if you could put a little color around that, I mean earnings were down year over year, so I was a little surprised that incentive comp was up and then maybe a little color on the professional fees as well.
Wayne Rancourt
Yes, on incentive comps what we typically do, Mark, is set a target with the Board on return on capital and on EBITDA, at the beginning of each year. And obviously '15 was quite disappointing relative to expectations early in the year with plywood pricing continued to decline, so we had very little incentive comp in Wood Products a year ago and lower compensation, frankly for the corporate officers that straddled the two businesses, and we're closer to target this year on both businesses.
And then the other thing is, we put in on our long-term incentives. We put in three-year cliff vesting on our LTI on the grants that were done this year, and the Board put in LTI grants that vest in '17 and '18 in essence to fill part of that gap.
So, if you look at the actual economics to the officer group, they remain the same in total. But the accounting treatment is, take a third of the three year vest, take half of the two year vest and take the full shot on the one year vest.
So, we've got, on a book basis higher reported incentive comp as we work through the transition to three-year cliff vesting on the LTI.
Mark Wilde
Okay. And then professional fees?
Wayne Rancourt
Mostly, lowers around acquisitions and due diligence.
Operator
Thank you. I'm showing no further questions in the queue at this time, so I’d like to turn the call back to Mr.
Rancourt for closing remarks.
Wayne Rancourt
Okay, thanks Nova for your help today. Appreciate everyone joining us on the call, email or phone if you have any follow-up questions.
And otherwise, we look forward to talk to you after we release year-end earnings. Have a great week.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program.
You may all disconnect. Everyone have a good day.