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Boise Cascade Co (NYSE:BCC)

Q2 2013 Results Earnings Call

July 23, 2013 8:00 AM ET

Executives

Wayne Rancourt - Senior Vice President, CFO and Treasurer

Tom Carlile - Chief Executive Officer

Stan Bell - President, Building Materials Distribution Operation

Nick Stokes - SVP, Building Materials Distribution Operation

Tom Lovlien - President, Wood Products Operations

Tom Corrick - SVP, Wood Products Operations

Analysts

Chip Dillion - Vertical Research Partners

Phil Gresh - JP Morgan Chase Securities

Adam Rudiger - Wells Fargo Securities

George Staphos - Merrill Lynch

Joe Stivaletti - Goldman Sachs

Alex Ovshey - Goldman Sachs

Mark Wilde - Deutsche Bank

Bill Hoffman - RBC Capital Markets

Daniel Downes - BC Holdings

Operator

Good morning. My name is Julie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Boise Cascade’s Second Quarter 2013 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 will remind you that this call may contain forward-looking statements about the company’s future business, prospects and anticipated financial performance. These statements are not guarantees of future performance and the company undertakes no duty to update them.

Although, these statements reflect management expectations today, they are subject to a number of business risks and uncertainties. Actual result 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 recent filings with the SEC.

It is now my pleasure to introduce you to Wayne Rancourt, Senior Vice President, CFO and Treasurer, Boise Cascade. Mr. Rancourt, you may now begin your conference.

Wayne Rancourt

Thank you, Julie. Good morning, everyone. I want to welcome you to Boise Cascade’s second quarter 2013 earnings call and business update. Joining me today on the call are Tom Carlile, our CEO; Stan Bell and Nick Stokes, the leaders of our Building Materials Distribution Operation; as well as Tom Lovlien and Tom Corrick, the leaders of our Wood Products Operations.

Turning to slide two, I’d point the information regarding our forward-looking statements and for those interested there is an appendix at the back of this presentation, it includes reconciliations from our GAAP net income to adjusted net income and EBITDA.

And with that, I will turn the call over to Tom Carlile.

Tom Carlile

Thank you, Wayne. Good morning. Thank you for joining us for our earnings call today. I’m on slide three. Housing starts continue to strengthen in the second quarter compared with a level seen in the same period in 2012.

Total U.S. housing starts were up 17% with single-family starts up approximately 14%. The Blue Chip consensus forecast for 2013 remains at about 1 million total starts as of the July report, which is encouraging. We are seeing impact of more residential construction activity and demand for our products in most areas of the country.

While June housing starts were lower than most economists had expected. Overall, housing demand continues to trend positively and long-term forecast still point to underlying housing demand around 1.4 to 1.5 million starts per year.

Our 16% sales growth in the second quarter resulted from a number of favorable events. In our Wood Products Manufacturing segment improved plywood pricing and higher Engineered Wood Products sales volumes were the primary drivers of the sales increase.

In our Building Materials segment our sales benefited from higher prices for many of their products we distributed, particularly commodity wood products, as well as increase sale volumes from increase construction activity compared to the second quarter of 2012.

We reported net income of $10.4 million in the second quarter 2013, compared with net income of $15 million in the same period last year. The decrease in net income is primarily a function of our conversion to a [CCOP] in 2013 and recording of a $6.8 million income tax provision during second quarter 2013. The demand backdrop continues to be better than last year and we are getting good leverage on our fixed cost as our sales strengthened in both businesses.

Moving to slides four and five, they show the commodity price indices for panel and lumber during 2012 and first half of 2013. Commodity prices for our panels and lumber begin to rise in 2012 and posted sustain increases through the end of the first quarter of 2013. In early April 2013, prices peaked and began a steep decent that continued throughout second quarter 2013.

In Building Materials business periods of increasing product prices can provide opportunity for higher sales and increased gross margin as we experience during the first quarter of 2013.

Sharply declining commodity price environments negatively impact profitability as we experienced during the second quarter of 2013. Composite, panel and lumber prices are moving up as we’ve begin the third quarter.

Last week we announced that we had reached an agreement to acquire two plywood plants in North and South Carolina for $102 million. These facilities will complement our existing plywood and engineered wood manufacturing businesses, and enable us to better service our customers in Eastern and South Eastern United States. We believe these plants generated approximately $19 million of EBITDA in 2012.

With that overview of the quarter, I’ll ask Wayne to provide more detailed financial results.

Wayne Rancourt

Thank you, Tom. Turning to slide six, wood product sale were $280 million in the second quarter, up 16% compared to the year ago quarter. The sales increase was attributable primarily to higher plywood prices and sales volume increases of laminated veneer lumber and I-joists.

Wood Products second quarter EBITDA was $29.6 million, up 36% from the year ago quarter, improved product pricing drove the positive earnings change from the comparative period offset partially by increases we saw in wood fiber costs. BMD’s sales increased 17% to $681 million in the second quarter due to 12% higher prices and 5% higher volumes than in second quarter 2012.

BMD’s second quarter EBITDA of $5.5 million was $5.4 million lower than the $10.9 million of EBITDA reported in second quarter 2012. The steady downward trajectory in commodity prices and a $4 million lower of cost or market inventory write-down during second quarter 2013 cause gross margins to suffer 270 basis point drop compared to the year ago quarter.

On slide seven, in Wood Products our second quarter $328 average net sales price for plywood was up 13% from second quarter 2012 and down only slightly from the average price in first quarter 2013. Plywood pricing at the end of the second quarter was 12% below the quarterly average in second quarter.

Our plywood sales volume were up 2% compared to the year-ago quarter. The product mix within our lumber facilities with its focus towards ponderosa pine lumber was beneficial to our results with overall lumber price realization up 15% compared to the prior-year quarter.

Turning to slide eight, our second quarter sales volumes per LVL and I-Joists were up 18% and 14% respectively compared with the year-ago quarter. Improving new single family home construction activity was the primary driver of our stronger sales volumes.

Our LVL sales realizations improved 5% from the year-ago quarter and 3% sequentially from first quarter 2013. Our I-Joists realizations increased 7% from second quarter 2012 and 3% sequentially. We believe the industry dynamics for engineered wood products are continuing to improve with high-capacity utilization rates in the markets recognition of the favorable product characteristics of engineered wood products.

On slide nine, BMD second quarter sales as I said were $681 million, up $101 million or 17% compared to the year-ago quarter. The higher average prices for commodity wood products gave the distribution business additional revenue lift in the second quarter of 2013.

However, as discussed in the previous slides, declining commodity prices in the quarter negatively impacted margins. With lower commodity wood products prices, BMD’s inventory investment declined about $20 million sequentially from the first quarter.

One can see on the right hand chart, that with the strong growth in new residential construction and the pricing environment for commodity wood products, general line sales have represented a smaller proportion of our overall BMD sales mix over the last several quarters.

However, general line products represent a larger portion of our sales mix sequentially as those products are more seasonal in nature and typically we have higher sales velocity in the second and third quarters. Many of our general line products, like composite decking and siding experienced demand from repair and remodel activity, as well as new residential construction.

Turning to slide 10, we have set out the key elements of our working capital. The drop in inventory and accounts payable represents normal seasonal inventory sell-through during the second quarter in our distribution segment as well as the commodity price declines that occurred in the quarter. As a reminder, this statistical information filed as part of our 8-K yesterday, as the receivables inventory and accounts payable data, broken down by each business segment for those interested in more detail.

On slide [seven], our debt and liquidity position remains strong with our net debt and total liquidity flat compared to the end of the first quarter. Our cash position also remains even as cash from operations during the quarter offset our capital expenditures and interest.

We expect to use $100 million of cash for the planned stock repurchase and $102 million for the acquisition of the two Southeastern private operations in the third quarter. We currently anticipate a $25 million drawn to our bank line in conjunction with the acquisition in September.

With that, I’ll hand it back over to Tom to wrap up.

Tom Carlile

Thank you, Wayne. I’m on slide 12. As I said, the current consensus estimate for 2013 total U.S. housing start remains at almost 1 million. We believe the demographics in the U.S. support a return to residential construction of 1.4 million and 1.5 million total starts per year in the years ahead.

We will continue to manage our business to be supportive of our customers and captured opportunities that market presents. Commodity product pricing begin to rise again in early July 2013 after the steady decline throughout the second quarter. However, future pricing could be volatile in response to industry operating rate and inventory level in their various distribution channels.

I believe we are well positioned for sales and earnings leverage as the housing recovery continues and we grow our company. Thank you again for joining us on our call this morning and your support as investors.

We’d welcome any questions at this time. Julie, would you please open the phone lines.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Chip Dillion from Vertical Research Partners. Please proceed.

Chip Dillion - Vertical Research Partners

Yeah. Thank you very much. And good morning Tom and Wayne. First point is -- thank you by the way for the detail you provided, when you reported. This one small suggestion is if you could put the volume and/or pricing in the press release which you released, I guess later on, that would be great.

But we certainly appreciate the detail. First question is on the acquisitions of the two plants in North and South Carolina. It looks like you paid about $215 or so per thousand square feet. And do you see them, I guess, today’s plywood prices has been -- the deal has been accretive. I’m assuming, you’re probably using, assuming very low financing cost, given that you have the cash on hand?

Tom Carlile

Yeah, Chip. I think all of your assumptions are correct. Yeah, we do see these plants as accretive and a very nice fit to our strategy, filling a geography in the Southeast. Therefore, we didn’t have manufacturing facilities. We have more veneer that can go either into the plywood business or into the EWP business. We know the plants well. Boise Cascade actually build Chester a number of years ago. So we’re very pleased with acquisitions.

Chip Dillion - Vertical Research Partners

And I guess, trying to just ask, I guess, 10 or 15 years ago, were these owned -- who owned these like 10 or 15 years ago. I think Moncure was an IP plant but I’m not sure?

Tom Carlile

No. I think the sequence is Boise sold both plants to Willamette Warehouses, ended up with them and Warehouses sold them to Atlas.

Chip Dillion - Vertical Research Partners

Got you. And then last question on the mills. I know the total capacity is about, I believe, this capacity is like 470 million square feet. How kind -- what kind of operating rate do you see and can you give us a rough idea over the next year, how much of the output would go straight to plywood versus EWP?

Wayne Rancourt

Chip, with this point, we’re not going to speak to the 2012 data. We’ll have an 8-K that will come out a little bit later with more financial details as we get through the carve-outs and get through the audit process.

And on the second question, around the veneer versus plywood balance, we’ve got an integration team that’s going to work on this over the next several weeks. Obviously, we’ve got some preliminary thoughts but the region manager that’s responsible for our Louisiana operations will also have responsible for the North and South Carolina operations. And he and the team from Moncure and Chester will come up with the plan but those plants are selling high strength veneer into the EWP arena today. So we would expect some mix between high-strength veneer going to EWP production and some into plywood.

Chip Dillion - Vertical Research Partners

Got you. And then the last question is, obviously you’re investing about $200 million both in these plants in your own stock. As we think about the distribution business, one key advantage you guys have is the ability to finance your growth without rights offerings and things like that, that we’ve seen some others do. Do you feel that, I mean, you’ll probably go into the bond market or do you think you have enough financing to finance the growth as we go out over the next couple of years in distribution without raising more money in the debt markets?

Wayne Rancourt

Well, we feel very good about our liquidity. As you know, we have got at the end of June $232 million in cash, about three-quarters of the acquisition in 10-K forward cash. And we still have $290 million undrawn on our asset-base planning facility. And clearly, there is an opportunity to grow that facility as the working capital grows that's back stopped by receivables and inventory. So to the extent we have working capital build in the distribution business. It’s readily financed at very attractive rates.

So we are not worried at all from a balance sheet standpoint. And clearly as our EBITDA continues to improve, we can take on additional leverage because we have a target leverage of somewhere around 2.5 to 3 times in -- if you look at the trailing EBITDA, numbers, we’re comfortable inside that today, even after spending the cash.

Chip Dillion - Vertical Research Partners

Got you. Thanks very much.

Tom Carlile

You are welcome. Thank you.

Operator

The next question comes from the line of Phil Gresh. Please proceed.

Tom Carlile

Good morning, Phil.

Phil Gresh - JP Morgan Chase Securities

Hey, good morning. First question is kind of follow-up on acquisition, any thoughts you might have on synergy potential with the existing assets and just kind of bigger picture, what kind of opportunity do you think this acquisition might open up for you longer term on plywood or EWP?

Tom Carlile

Phil, we don’t have a synergy number that we’re ready to share at this point in time. If it’s, well, Wayne already described how we are going to operate it as part of our existing business. So we think we will be very, very efficient in with that. These facilities, again having veneer and plywood, you have the opportunity to expand in the engineered wood if and when the time occurs that we need the capacity to do that. But in the meantime, we will run those facilities as they are currently running.

Phil Gresh - JP Morgan Chase Securities

Okay. And just in the context of the acquisition pipeline, I mean, as if, was this kind of one major thing you are working on or do you have other opportunities that you are seeing in the pipeline today that might be a little expected over the next 12 to 18 months?

Wayne Rancourt

All right, Phil, we don’t comment on speculation on future things. So I would describe it as there are other things on our wish list that we have an interest in, I mean, clearly having capacity in the Southeast and along the eastern sea board was important.

So we knew this as one of the things that we were clearly targeting over the last couple of years. And when these plants came available in a very, very good fit and there are similar assets that we have the opportunity to get them at price that makes sense for our shareholders. There are things we’d like to do over the next 12 to 18 months.

Phil Gresh - JP Morgan Chase Securities

Okay. That’s helpful. And then just on the fundamentals on the EWP side, maybe you could just comment on pricing that you are able to achieve this quarter. How that compare with what you thought you might be able to achieve and just what your thoughts are on pricing for the back half of the year?

Tom Corrick

Phil, this is Tom Corrick. You know we announced price increase in early June, late May, I am not sure of the exact date. It has been obviously announcing it into the phase of falling commodity prices made it different than the previous price increases we have announced. And so there has certainly been challenging to get that in place that we see it going into effect across most of the country. And certainly, I am guessing somewhere around two-thirds of what we thought we’d get. But it is going to be pretty gradual coming in because it was certainly a challenging effort to get that price increase in place.

Phil Gresh - JP Morgan Chase Securities

Okay. Thanks. I’ll turn it over.

Tom Carlile

Thanks, Phil.

Operator

The next question comes from the line of Adam Rudiger from Wells Fargo Securities. Please proceed.

Adam Rudiger - Wells Fargo Securities

Yeah. Good morning. This might be a question for Stan. I was just wondering if you had any sense of what inventory looked like in wood products that maybe some of your larger more important customers. And the reason I ask I was wondering if we see prices firming or maybe even rising a bit in July, if that’s at the stage, if those guys are running lean for potential price squeeze on the upside, some point during this quarter?

Stan Bell

I wouldn’t say we are expecting a price squeeze in the third quarter. Certainly, we are seeing some uptick in pricing across the system. I think to your question about inventory levels with our customers, we are seeing those at fairly average levels out there.

I think having gone through the big downturn in the second quarter, there is a lot of customers who are reverting back to buying smaller quantities out of our inventory and of course, that keeps our yards busy. But it is higher margin business for us but don’t see a lot of woods stacked up that should affect the pricing in the third quarter to any great extent.

Adam Rudiger - Wells Fargo Securities

Okay. And then can you -- you mentioned that I think in your release and in your prepared remarks, you were seeing some log cost increases. Can you quantify that?

Wayne Rancourt

Adam, this is Wayne. As expected and as we discussed in our first quarter, I mean, most of the pressure we have seen on cost, on logs compared to 2012 has been in the west where we have seen increases in the low teens and then in the south, it’s been mid single digits. So much more moderate in the south as expected given the growth rates there and given the stocking levels.

And it’s moderate a little bit in the west with less pressure on exports stage. So we will see how it plays out the rest of the year, but that’s kind of what we are seeing so far this year.

Adam Rudiger - Wells Fargo Securities

Okay. And then last question, I think you mentioned $12 million in EBITDA from the acquisitions last year, so that would suggest around 8.5 times trailing on that?

Wayne Rancourt

Adam, it was $19 million in EBITDA last year from those businesses.

Adam Rudiger - Wells Fargo Securities

Okay. So then more like five times EBITDA, is that a typical multiple you are seeing for acquisitions?

Wayne Rancourt

I would say there isn't a typical multiple on acquisitions. I mean, for the reason, you haven’t seen us do anything in the distribution business. We’ve had a couple of conversations but sellers wanted to be priced up at 2005-2006 peak EBITDA number and wanted an LTM EBITDA multiple.

So we’ve had a couple of conversations but haven't been able to come together on price. And we’ll see how that plays out going forward. But as Tom mentioned earlier, we are very focused on doing things that add value for shareholders. We’re not interested in over paying.

Adam Rudiger - Wells Fargo Securities

Okay. Thank you very much.

Wayne Rancourt

Thank you.

Operator

The next question comes from the line of George Staphos, Merrill Lynch. Please proceed.

George Staphos - Merrill Lynch

Hi, everyone. Good morning.

Tom Carlile

How are you doing?

George Staphos - Merrill Lynch

I wanted to come back to the wood resources acquisitions for a minute. When I look at the multiple based on historical per MSF levels. It was actually a pretty reasonable price that you pay at least again based on the history, can you let us know where these mills are say on the cost curve. I realize that, you are not buying just to run plywood. There is a lot more strategy involved in looking at these mills, but where in the cost curve were set differently, what level of investment do you need to make further from here, to improve them to a Boise standard, if at all, at a recognition, bought Chester then I had a couple of follow-ons?

Tom Carlile

George, the two plants, Chester is typical commodity pine plywood mill. Moncure is more of a hard wood mill that's next to our soft wood and hardwood. Chester is a low cost mill -- amongst the lowest costs mill. So we are very pleased by that and there is some capital that will be needed going forward, but we don’t anticipate any major capital in those facilities beyond normal upgrades and drier improvements and things that we do on our other mills.

George Staphos - Merrill Lynch

Okay, Tom. But are we talking few million dollars or tens of million dollars, just sounds like it’s the former not the latter.

Tom Carlile

Yeah. It’s not tens of millions, no.

George Staphos - Merrill Lynch

Okay. And the other question I had around that, do you anticipate given again the veneer capacity that you’re getting with this meaning by definition? Do you see yourselves adding EWP capacity now that you have the veneer and the plywood lay down in the area or is it too early to call that?

Tom Carlile

It’s one, the mills would provide us that opportunity if there is a need for incremental capacity, but we see that being down the road. It’s an option that will work well. It’s not something we see pursuing in the near future.

George Staphos - Merrill Lynch

Yeah. Obviously, I guess with operating rates around 60% or so. That’s helpful. I appreciate the color there. I guess one other question I’ll turn over and come back. You had mentioned in your opening remarks and I realized it was more of a macro comment that while the June existing home sales data, I think which referring to was little bit disappointing the forecast still see housing trending towards $1.4 million to $1.7 starts and certainly that’s our view and that’s the consensus.

With all that said, in your day-to-day business, in your field checks and what you are hearing from your customers? Have you seen any change either positive or negative in terms of demand and expectations from, are there the distribution centers or the builders in terms of the progress of the housing market?

Tom Carlile

Nick or Stan, do you want to -- you want to take that one?

Stan Bell

Well, I would say that it’s certainly continues to be regional in terms of what we’re seeing out there. I think right now most of our locations would report very positive outlook from our customers. Some projects have been delayed because of regional weather patterns out there. I think that going into the third quarter we should see the normal pick up in business as people try to dry some jobs in for the winter months. But overall I would say our customers are pretty optimistic out there.

Tom Carlile

(Inaudible) and check the builders.

George Staphos - Merrill Lynch

All right. Thank you. I’ll turn it over.

Tom Carlile

Thank you.

Operator

The next question comes from the line of Joe Stivaletti from Goldman Sachs. Please proceed.

Joe Stivaletti - Goldman Sachs

Good morning. Most of my questions have been answered, but I was wondering if you could give us your perspective on your -- as you think about the recent these two moves with the acquisition and the stock buyback and also potentially look at future acquisitions. How do you think about your leverage target? What you might be comfortable with over a cycle? I was just curious to get that perspective?

Wayne Rancourt

Hi Joe. It’s Wayne. As I mentioned earlier, Tom and I, and our Board really feel like 2.5 to 3 times leverage is appropriate, given the cyclical nature of our business. And so as we get back towards a more normalized housing environment, obviously we’ve got capacity to take on additional debt.

If you’ve looked at our EBITDA in 2012 was $96 million on a trailing basis, at the end of June, I think we’re at $118 million. So with 250 we’ve got in senior notes today and if we take on an additional $25 million on, say, [ABL] line we’re clearly very comfortable with where we are compared to the trailing EBITDA numbers. And as our EBITDA continues to improve, we can take on additional debt.

But, we are certainly not thinking about our debt capacity today in terms of mid-cycle earnings and we would look at the leverage and the debt levels moving up in tandem with our EBITDA not ahead of and not in an anticipation of improving our earnings. We want to make sure we maintain this strong balance sheet as we move through the recovery.

Joe Stivaletti - Goldman Sachs

So that you’re saying you’d be comfortable if something presented itself that was attractive you’d be comfortable in that 2.5 to 3 range based on at where we are today in the cycle? Is that do I understand that right?

Wayne Rancourt

Yeah. I mean similar to the acquisition we are making in Southeast. I mean its bringing $19 plus million of EBITDA with it.

Joe Stivaletti - Goldman Sachs

Sure.

Wayne Rancourt

So that obviously adds to our debt capacity and we think about it the same way if we’re looking at an acquisition we’ve looked at the incremental EBITDA it brings and we look at what our debt levels are compared to the EBITDA in the base business and then make an appropriate call us said what the appropriate leverage would be to make the acquisition.

Joe Stivaletti - Goldman Sachs

Okay. Thank you.

Wayne Rancourt

You’re welcome. Thank you, Joe.

Operator

The next question comes from the line of Alex Ovshey from Goldman Sachs. Please proceed.

Alex Ovshey - Goldman Sachs

Thank you. Good morning.

Tom Carlile

Good morning Alex.

Alex Ovshey - Goldman Sachs

I wanted to ask you guys on how you think about share buyback, what valuation metrics are you looking at in regards to your own stock that that’s giving you confidence to deploy $100 million to buyback the stock at the current levels?

Wayne Rancourt

Alex, I apologize for not being able to address your question with us being currently in registration. Our SEC council has given us guidance that we shouldn’t talk about the proposed offering, the related buyback and those topics on this call. So we’re apologies but we’re going to have to limit the Q&A to matters related to the earnings release.

Alex Ovshey - Goldman Sachs

Okay. I understood, Wayne. I understood. And then I just wanted to ask a follow-on on Joe’s question just thinking about the balance sheet capacity, just over the next 12 months to the extent that an opportunity does come up. I mean, again, I wouldn’t the next 12 months window. What do you actually see as the balance sheet capacity over the next 12 months you’re doing other deal?

Wayne Rancourt

I mean, clearly, I think we’ve got headroom off of our current balance sheet to do a smaller deal. Smaller being $100 million or less. I think if we start to push meaningfully north of $100 million, we’d have to take close attention to what the target EBITDA is. And obviously anything meaningfully north of $100 million, we have to look at the balance sheet of the target and make some decision on the leverage we could take on.

But that’s one of the advantages of being a public company is we do have other options available to finance if we’ve got an acquisition that we think is sizable and create considerable value for our shareholders. We’ve got a lot of flexibility in terms of how we could finance it.

Alex Ovshey - Goldman Sachs

Okay. It’s very helpful color, Wayne. And just last question, can you just talk about your utilization rates right now in the plywood mills and the engineered wood facilities?

Tom Carlile

Yeah, Alex. In our plywood mills, we’re pretty much at capacity, operating capacity and in our EWP mills our current capacity is in the 60% range.

Alex Ovshey - Goldman Sachs

Okay. Thanks Tom.

Tom Carlile

Thanks Alex.

Operator

The next question comes from the line of Mark Wilde from Deutsche Bank. Please proceed.

Mark Wilde - Deutsche Bank

Good morning.

Tom Carlile

Good morning, Mark.

Wayne Rancourt

Good morning, Mark.

Mark Wilde - Deutsche Bank

Just have kind of a few follow-ons here. I wanted first of all, can you just give us a sense of what you’re seeing in the first couple of weeks of July in terms of activity?

Wayne Rancourt

Yeah. I think, Mark, our activity reflects a lot of what you’re seeing in random with composite panel and lumber prices picking up. There was actually a little better than we expected activity the first part of the week of the 4th of July and then coming back from the 4th, people seeing they have their P/L books back out and business activity has picked back up. So the tone that’s first couple weeks of July has been dramatically different than the tone we saw in early June.

Mark Wilde - Deutsche Bank

Okay. And then you mentioned, Wayne, that you seen a little bit of weakness recently in kind of western log prices. I wondered in just both regions, both the south and the west. If you can just remind us about sort of how much kind of forward visibility you have on your log costs or how much of it, have you contracted out quarter, two quarters, three quarters forward and how much you kind of moving with the spot market?

Tom Carlile

Mark, this is Tom. We have some visibility. We have and I don’t know the percentages, but we have, exactly on top of my head. But we have 30%, 40% of it that maybe contracted out 12 months or longer. But there is a lot of gate wood as well maybe a third of that. So we have visibility out three to six months, pretty good visibility and more so in the west maybe in the south. But the south has been much more stable than the west.

Mark Wilde - Deutsche Bank

Okay. All right. Then last question, just come back to the two plywood plants that you are acquiring and potential to move into EWP near those locations. Just would that more likely involve building facility, EWP facility like near those plywood plants, or could you acquire existing EWP capacity?

Tom Lovlien

Mark, that’s far enough out. All those options, there should be something we would probably consider, but so far out, there is not something that we have on our table right now.

Mark Wilde - Deutsche Bank

Okay. All right. Fair enough. Thanks guys.

Operator

Thank you. The next question comes from the line of Bill Hoffman from RBC Capital Markets. Please proceed.

Bill Hoffman - RBC Capital Markets

Yeah. Thanks and good morning.

Tom Carlile

Good morning.

Bill Hoffman - RBC Capital Markets

(Inaudible) my question -- most of my questions has been asked, but just a quick one on working capital as you look towards the end of the year. It feels like markets are picking up again for a little bit of fall building season, I just wonder how you’re looking at managing the balance sheet going into next year, especially within the context of higher treasury rates and higher mortgage rates, and how you think that might affect the business going into next year?

Tom Carlile

Well, the main place we see the working capital growing is in distribution and while we’ve more or less guided people to as if you think about the topline revenue increase, we would generally think about 10% of that revenue increase showing up in working capital.

One other thing that’s encouraging is Stan, Nick and the team has done a very good job of managing working capital over the last several quarters, we expect that to continue going forward. And as you know we’ve got a very entrepreneurial culture in that business and we have an incentive plan that reaches down really through the employee ranks that part of the incentive is driven by return on networking capital. So there is a pretty tight focus on receivables and inventory, and making sure we manage the working capital billed.

So, you know the good news is we’ve got a balance sheet that can support your organic growth that, as I say we are happy to have that topline growth and we’ve got the capacity on working capital, but it will grow in ’14 right about where the topline had and I give 10% as a guide.

Bill Hoffman - RBC Capital Markets

Great. Thank you.

Operator

The next question comes from the line of Chip Dillion from Vertical Research Partners. Please proceed.

Chip Dillion - Vertical Research Partners

Yeah. Just a couple follow ups. I notice the Chester plant is definitely in a very rural area, but the Moncure plant is only about 15, 20 miles from the Raleigh/Cary area, which is growing rapidly. I was just wondering how you view your wood supply situation now. Do you have a long-term contracts with local land owners or and how do you see that developing overtime just given that you have a pretty fast growing area there?

Tom Carlile

Yeah. Chip, I’ll start. In our due diligence and we did pretty thorough review of the facilities. We view particularly the Chester wood basket to be very favorable with the growth substantially above the drain. And in Moncure we also find out a good wood basket and Moncure is a much smaller plant than Chester. So there is not the need in Moncure that we have in Chester. Tom Lovlien you got -- you want to add anything?

Tom Lovlien

That’s a great question. And yeah, Moncure is very close to the Raleigh-Durham area. But remember Moncure as mentioned earlier is a hardwood mill. And hardwood supply that we draw from hardwood areas -- that we draw from for that plant are to the east and Southeast of the facility. So the plant has not historically drawn significant amount of wood from what was rural areas to the west. And so we in the due diligence process, clearly we’ve added that out to the extent.

Chip Dillion - Vertical Research Partners

Okay. That’s very helpful. Second thing, the question, definitely, big picture high level is, if you look at the housing situation out there and what you’ve seen in both the distribution and the wood products businesses. Do you sense that there is a constraint out there in terms of the ability of the sort of demand change to fulfill the true demand is for new houses and new residential construction?

I mean, we’ve been hearing difficulty in getting framers in other -- in certain areas. And if that is the case, do you see how -- do you see a path that your customers talk about how they’re fixing that in terms of hiring people and training people to actually do the work.

Tom Carlile

I’ll ask Tom Corrick to tackle that one first. He has been talking to some builders.

Tom Corrick

Yeah. As we talk to builders, I think the general theme that we’re hearing is that they’re feeling pretty restrictive across the number of fronts. Certainly, labor is the big one but honestly land, I think is the bigger one. And what we’re hearing pretty routinely from them is that they could sell more houses than they can build right now. And they really don’t want -- won’t get in a position where they run out of inventory to sell and to sell houses at a price that they could sell for more next year.

And so they have been pretty aggressively raising prices that we’ve been talking to keep a good balance between supply and demand and because they are seeing constraints on both land and labor. I would say they are being pretty measured in how they are approaching this situation in terms of managing supply and demand.

Chip Dillion - Vertical Research Partners

And do they give you any view in terms of when the land situation may alleviate. I would imagine that takes -- while it wouldn’t take three years, I guess, to just own and acquire land, it might take 6, 12 months.

Tom Corrick

They complain about it, would be the most I could say about it but I’m not an expert in that one at all.

Chip Dillion - Vertical Research Partners

Okay. Well, this is still very helpful. Thanks.

Tom Carlile

Thank you.

Operator

The next question comes from the line of Daniel Downes from BC Holdings. Please proceed.

Daniel Downes - BC Holdings

Hi. Good morning.

Tom Carlile

Good morning.

Daniel Downes - BC Holdings

If I did the quick math right on your Chester and Moncure acquisitions, it looks like the multiple, you paid EBITDA was around 5.3 times. I was just wondering if this level of multiples indicative of where the private market values are sitting at these days or was there something special about the situation that had more depressed multiple?

Wayne Rancourt

Well, I am not sure, like I can answer all of your questions. Our valuation of Chester and clearly, there was thoughts on a multiple of EBITDA but there is also how it fits into our system and what we can do both in our manufacturing and distribution business with those assets. So, we are very comfortable with the multiple that we paid to the plants.

Daniel Downes - BC Holdings

Okay. Like I guess this race is a kind of a longer term question, where, if I look at your own stock trading here at 11.5 times consensus EBITDA for this year, you know versus what private market values are the five times level. What does the company think about its capital allocation plans as far as M&A, dividends or share repurchases because it seems like there is a tremendous [discrepancy] there?

Wayne Rancourt

We mentioned on the February conversations when we did the road show that we thought our plywood earnings that we had in 2012 were probably in line with what people like to expect going forward in terms of kind of a mid-cycle numbers. So if you think about where our production levels were and where pricing was.

We kind of indicated during the road show that we thought most of the upside earnings potential in plywood was in place. And that maybe the case I want to speak for the sellers, but that may be the thinking that they have on Chester and Moncure. Most of their earnings leverage for us going forward as the company is really in the manufacturing side is going to come from engineered wood products incremental volume and incremental price.

And then we think we’ve got tremendous upside both in terms of topline revenue in earnings and our distribution business. But if you look at as Tom mentioned, high operating rates in plywood and really pretty decent prices and margins, we think we are probably at mid-cycle on the plywood component of our business. And the really upside as I say is engineered wood, a little bit of our industrial lumber, particleboard in the distribution business. We are not counting on a lot of incremental EBITDA coming out of our plywood business. We think that's running at pretty good levels today.

Daniel Downes - BC Holdings

Okay. Thank you.

Wayne Rancourt

You are welcome.

Operator

(Operator Instructions) The next question comes from the line of George Staphos from Merrill Lynch. Please proceed.

George Staphos - Merrill Lynch

Hi, guys.

Tom Carlile

Hi George.

Tom Carlile

Just a couple -- hi. Just a couple of questions to follow up. Now you said, I think Tom Corrick was saying that you are now effectively at capacity in plywood. I assume that suggests that whatever mills you had idle or curtailed, late January, early July, they are back up and running and running full speed. Would that be fair or are those mills still for whatever reason curtailed?

Tom Corrick

Yeah. We took a little bit of downtime over the week of 4th of July and that was really just a balance order files. As we said that procurement activity in late June was pretty slow. And so rather than trying to put supply into the market that the market didn't have an appetite before. We thought it was better to take a little bit of downtime but those plants are back up and running at normal operating rates today. And we don’t anticipate any downtime at this time.

George Staphos - Merrill Lynch

Okay. Thanks for that. And then from what you could gather, how much capacity, I know you get this question asked a lot, but just if you could give us a refresher. How much plywood capacity would you estimate is currently idled in North America that conceptually could come back even if it may or may not be practical to bring it back?

Wayne Rancourt

George, it’s Wayne, I wouldn't want to venture because most of the idle capacities is in the hands of Georgia-Pacific. And as you know they are private. And so we don’t have a lot of visibility on what their plans are but they -- we tend to think of them as having about 40% of the overall North American plywood capacity. And I wouldn’t want to speak for what they may or may not do. They just restarted or I should say started for the first time there.

OSB plant, they purchased from Grant Forest Products which was 800 million square feet of OSB in the Carolinas and what they planned to do with regard to OSB in plywood, I wouldn’t want to speculate.

George Staphos - Merrill Lynch

That's fair, Wayne. I guess the last question I had, I think Phil had been asking it and I think Tom again, you were saying that you expect to get about a two-thirds of this price increase. If I’m misrepresenting what you said, please correct me but did you actually mentioned what price increase you are out with into the market, if you had said that, I had missed that as well. What is the price increase at least that you have nominally out in the market? Thanks and good luck in the quarter.

Tom Carlile

It’s 5% in the U.S.

George Staphos - Merrill Lynch

Okay. Thank you, Tom.

Tom Carlile

Thank you. Julie, we have time for maybe one more question? There is one?

Operator

You have no more questions at this time. I would like to turn the call over to Tom Carlile for closing remarks.

Tom Carlile

Thank you for your interest in the company and joining us in the call today. And we look forward to speaking with you in the next quarter. Have a good day.

Operator

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good day.

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