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Boise Cascade Co (BCC 0.69%)
Q3Â 2018 Earnings Conference Call
Nov. 06, 2018, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning. My name is Lauren, and I'll be your conference facilitator today. As a reminder, this call is being recorded. At this time, I would like to welcome everyone to Boise Cascade's Third Quarter 2018 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions)
Before we begin, I remind you that this call may contain forward-looking statements about the Company's future business prospects and anticipated financial performance. These statements are not guarantees of future performance and the Company undertakes no duty to update them. Although these statements reflect management's expectations today, they are subject to a number of business risks and uncertainties. Actual results may differ materially from those expressed or implied in this call. For a discussion of the factors that may cause actual results to differ from the results anticipated, please refer to Boise Cascade's filings with the SEC.
It is now my pleasure to introduce you to Wayne Rancourt, Executive Vice President, CFO and Treasurer, Boise Cascade. Mr. Rancourt, you may begin your conference.
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Thank you, Lauren. Good morning, everyone. I would like to welcome you to Boise Cascade's third quarter 2018 earnings call and business update. Joining me on today's call are Tom Corrick, our CEO; Dan Hutchinson, Head of our Wood Products operations; and Nick Stokes Head of our Building Materials Distribution operation.
Turning to slide two, 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 adjusted EBITDA.
Now, I would like to turn the call over to Tom Corrick.
Tom Corrick -- Chief Executive Officer
Thanks, Wayne. Good morning, everyone. Thank you for joining us for our earnings call today. I'm on slide three. Our third quarter sales of $1.3 billion were up 9% from third quarter 2017. Our net income was $13.8 million or $0.35 per share, down from $0.81 per share in the year-ago quarter. Reported net income for third quarter 2018 includes $16.3 million or $0.41 per share of after-tax losses from a non-cash pension settlement charge and a non-cash impairment loss on assets held for sale in Northeast Oregon.
Our Wood Products Manufacturing business reported segment income of $13.9 million in the third quarter compared to $24 million of segment income in the year-ago quarter. These results reflect stronger product pricing. However, better pricing was more than offset by higher log costs in the Pacific Northwest and the impairment loss in Northeast Oregon.
Our Building Materials Distribution business reported segment income of $23.5 million on quarterly sales of $1.2 billion for the third quarter compared to the $39.4 million segment income on quarterly sales of $1 billion in the comparative prior-year quarter. Rapidly falling commodity wood products pricing caused significant gross margin pressures for our Distribution business in the quarter.
Wayne will walk you through the financial results in more detail and then I'll come back to talk to describe actions we are taking on capital allocation and provide our outlook before we take your questions.
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Thank you, Tom. I'm on slide four. Wood Products' sales in the third quarter including sales to our Distribution segment were $402.7 million, up 10% from third quarter 2017. As Tom mentioned, Wood Products reported segment income of $13.9 million in the third quarter. Reported EBITDA for the business was $32.7 million, down from the $39.4 million of EBITDA in the year-ago quarter. The decrease in EBITDA was due primarily to a $10.4 million non-cash impairment loss and higher log costs in the Pacific Northwest offset in part by higher plywood and engineered wood products pricing.
BMD sales in the quarter were $1.2 billion, up 11% from third quarter 2017. Sales prices and sales volumes increased 7% and 4%, respectively. BMD reported segment income of $23.5 million or EBITDA of $28.3 million. This compares to segment income of $39.4 million and EBITDA of $43.3 million in the prior-year quarter. The decline in income was driven primarily by a gross margin decrease of $10.3 million, resulting from a steady decline in commodity prices throughout third quarter.
The amounts for unallocated corporate costs and other items impacted our reported adjusted EBITDA can be found in the tables of our earnings release. The net of those items was negative $18.2 million in third quarter of 2018 compared with negative $6.9 million in third quarter 2017. Non-cash pension settlement charges negatively impacted third quarter 2018 EBITDA by $11.3 million.
Turning to slide five. Our third quarter sales volumes for laminated veneer lumber and I-joists were up 9% and 8% respectively compared with third quarter 2017. Pricing in third quarter for LVL and I-joist was up 6% and 9% from the year-ago quarter, reflecting price increase actions taken in 2017 and earlier this year.
Turning to slide six. Our third quarter plywood sales volume in Wood Products was 368 million feet compared to 405 million feet in third quarter 2017. The $357 average plywood net sales price in third quarter was up 10% (inaudible) third quarter 2017. While average plywood pricing in third quarter remained well above historical trends, prices were down about 10% from the start of the quarter to the end of September and have declined roughly another 15% during the month of October. Fourth quarter 2018 plywood pricing is likely to be well below our reported third quarter average.
On slide seven I will transition to discussing the results for our Distribution business. The key factor in the quarter impacting BMD's earnings was a sharp drop in lumber and structural panel pricing. On slide seven we have a chart showing the Random Lengths lumber composite for 2016, 2017 and 2018. Lumber pricing began to weaken in June and continued declines throughout the third quarter. Lumber price fell during October and has recently hit levels not seen since 2016.
On slide eight you can see a chart showing the Random Lengths panel composite for 2016, 2017 and 2018, and the story is very similar to what has happened in lumber.
Moving to slide nine. BMD's third quarter sales were $1.2 billion, up 11% from third quarter 2017. By product area, BMD's sales of commodity products increased 10%, general line products increased 9% and EWP sales increased 18%. Gross margin percentage for BMD in third quarter was 10.3%, down 210 basis points from the 12.4% reported in third quarter 2017. The gross margin decline was a direct result of the commodity price decline shown on the previous slides. BMD's EBITDA margin was 2.4% for the quarter, down from the 4.1% reported in the year-ago quarter. We are not anticipating a meaningful rebound in lumber and structural panel pricing before year-end. So BMD will be challenged with less gross margins again in the fourth quarter. With commodity pricing for lumber and structural panels currently well below fourth quarter 2017 levels, price deflation in distribution costs negatively impact operating expense leverage this quarter.
On slide 10 we have set out the key elements of our working capital. Company net working capital, excluding cash, income tax items, assets held for sale and accrued interest decreased $16.5 million during the third quarter. Accounts receivable, inventory and accounts payable all decreased with the deceleration of sales in the quarter as pricing fell. A statistical information filed as Exhibit 99.2 to our 8-K has the receivables, inventory and accounts payable data broken down by segment for those that are interested in more detail.
I'm now on slide 11. We finished third quarter with $181 million of cash. Our total available liquidity at September 30th was approximately $577 million, which reflects our cash and availability under our committed bank lines. Our capital spending excluding acquisitions is expected to be between $75 million and $85 million this year. Capital spending in 2019 will likely be between $85 million and $95 million as we execute on projects at our manufacturing operations in Chester, South Carolina and Florien, Louisiana. Despite the unusual book tax rate this quarter, we continue to expect our effective book tax rate to be about 25% going forward.
I'll now turn it back over to Tom to discuss our capital allocation priorities and outlook.
Tom Corrick -- Chief Executive Officer
Thanks, Wayne. I'm on slide 12. As we've discussed on past calls, we are working diligently to grow Boise Cascade and deploy capital in a manner that creates value for our shareholders and other key stakeholders. Last quarter, we discussed our upcoming capital plans for Chester, South Carolina.
I am pleased that our Board has also authorized proceeding on additional strategic spending at our Florien, Louisiana plywood plant to modernize the log utilization center over the next 18 months. The planned project will put the mill in a very strong competitive position and improve our veneer self-sufficiency. The Board also approved an increase in our quarterly dividend from $0.07 to $0.09 per share. Fill-in acquisitions in our distribution business remain a key priority. We are very pleased to have reached an agreement to acquire Arling Lumber in Cincinnati, which is expected to close before year-end.
Moving to the outlook on slide 13. The October consensus estimate for 2018 US housing starts is 1.28 million, up from 1.2 million in 2017. The consensus estimate for 2019 implies only modest growth to 1.32 million starts as affordability issues and constraints on construction labor are acting as headwinds to underlying demographic-driven demand. While we believe housing starts could reaccelerate next year, we are focusing on the areas we can control to drive both revenue and earnings improvement.
In Wood Products, we are focused on achieving operational excellence and driving improved returns. We completed the sale of two saw mills and our particleboard operation in Northeast Oregon to Woodgrain Millwork last week, generating cash proceeds of $15 million. Those facilities fit better with Woodgrain than with our veneer-based manufacturing focus.
We also announced this morning our plan to permanently cease production of laminated veneer lumber at Roxboro, North Carolina by year-end. Unfortunately, after a great effort by the team at Roxboro, we have been unable to reduce manufacturing cost to an acceptable level. The curtailment is obviously not the outcome we expected when we acquired the Roxboro facility in early 2016. But given where we stand on operating performance, it is the action we need to take.
Wood Products will record a write-off of approximately $60 million in the fourth quarter related to the Roxboro LVL curtailment, essentially all of which will show up as additional depreciation. Roxboro will continue to produce I-joist and we anticipate no impact on our customers from the laminated veneer lumber curtailment as we have additional capacity and expansion opportunities at our Alexandria, Louisiana, and Thorsby, Alabama, EWP facilities that allow us to maintain our current service profile and also support future growth.
Effectively managing the impacts of commodity price declines remains at the forefront for both our Wood Products and Distribution group in the quarter. For BMD, the impact of the commodity price declines is likely to play out this quarter and make for difficult revenue and earning comparisons in the first half of 2019. However, Nick and his team continue to make good progress on their strategy of seeking acquisitions in specific geographic markets, looking at product line extensions and pursuing other avenues to push up sales and earnings.
To close, I want to thank our employees for executing well in a falling commodity pricing environment and working safely. I appreciate each of you joining us on our call this morning. We would welcome any questions at this time. Operator, would you please open the phone lines?
Questions and Answers:
Operator
Thank you. (Operator Instructions) And our first question comes from George Staphos with Bank of America. Your line is now open.
Molly Baum -- Bank of America Merrill Lynch -- Analyst
Hey, guys. This is actually Molly Baum sitting in for George. Thanks for all the details. My first question, other than the additional depreciation, how should we think about the earnings impact from shutting the LVL production at Roxboro? And on top of that, what are Boise's plans for that line longer term, are there perhaps opportunities to move into other wood product grades? Thank you.
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Molly, this is Wayne Rancourt. On Roxboro, as many on the call know, we had losses in 2017 on an EBITDA basis that ranged between $800,000 and $1 million a month, and lost slightly over $10 million on an EBITDA basis in 2017 in that facility. As Tom mentioned, we made very respectable progress this year, but unfortunately, year-to-date, the operating losses on an EBITDA basis are around $5 million and we started running up against technical issues that we thought were basically insurmountable and weren't going to be able to get laminated veneer lumber portion of Roxboro to a cost position that made sense to operate over time.
So we're permanently curtailing. We will continue to make I-joists at Roxboro. They are an important part of our Southeastern footprint, it backs up the I-joists capacity we have at Alexandria, Louisiana, and then production we have in New Brunswick. And so we anticipate the I-joists production at Roxboro to continue for the foreseeable future.
Dan Hutchinson -- Executive Vice President-Wood Products
Yeah, and this is Dan Hutchinson. Just on the I-joists production at Roxboro, it has the capability of producing a deeper I-joist than our Alexandria facility does. And so as we continue to get -- we continue to ramp that up, we'll be able to use that deeper I-joist to help us in multi-family and light commercial areas in the Southeast.
Molly Baum -- Bank of America Merrill Lynch -- Analyst
Thank you for that. And then, just two quick follow-ons. How are inventories and supply chain for plywood and other product grades? And then the last one, just the latest you're hearing on imports from Brazil of plywood? Thank you and I'll turn it over.
Dan Hutchinson -- Executive Vice President-Wood Products
Yeah, this is Dan Hutchinson again. I'll answer part of that. On the LVL side, our inventories at our mills are excellent. I'm going to let Nick talk about the supply chain. I haven't seen the latest, the latest monthly import data from Brazil. But it has been a very strong year coming in from Brazil. I have to assume that the recent dramatic decrease in plywood pricing is going to have some impact and the chit start to fall off and then --
I'll let Nick talk about what he thinks about plywood and LVL and inventories and the chain.
Nick Stokes -- Executive Vice President-Building Materials Distribution
Good morning. As everyone on the call knows, there is no empirical data around how much inventory of any product is available. So you have to rely on sort of some anecdotal evidence from customers and conversations. From those conversations, I would tell you that I think most of our customers think they're adequately inventoried across the board, particularly on the commodity products plywood to mention commodity wood products. Certainly, they are expecting some seasonal adjustments as Northern geography slide into winter. And to some degree, they reacted to the price reductions over the last few months in terms of trying to keep them vain. So I would tell you that based on that, I think, they are adequate for the volumes that they expect over the next 30 to 60 to 90 days.
Molly Baum -- Bank of America Merrill Lynch -- Analyst
Thank you.
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Thanks, Molly.
Operator
Thank you. And our next question comes from Brian Maguire with Goldman Sachs. Your line is now open.
Brian Maguire -- Goldman Sachs -- Analyst
Hey, good morning, everyone.
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Good morning, Brian.
Brian Maguire -- Goldman Sachs -- Analyst
Hey, Wayne. Appreciate the comments on the intra-quarter trends in plywood pricing in October. Just wondered if you could tell us roughly what your realization price is today versus the third quarter average and kind of remind us the sensitivity you got on that pricing in a seasonal quarter like 4Q?
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Great question, Brian. For the third quarter average, we were $357 on a 3/8 basis. And as I said, over the quarter we fell about 10% from the beginning of the quarter to the end of September. And as of the end of October, it was down another 15%. So --
Brian Maguire -- Goldman Sachs -- Analyst
That maybe 20% or so from it?
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Yeah. So if we were at $357 we'll see how much lag we get in terms of our pricing versus what showing up spot on Random Lengths, but it's not hard to imagine that we're going to move closer to $300 by the end of fourth quarter on an average.
Brian Maguire -- Goldman Sachs -- Analyst
Got you. All right. And then as far as sensitivities, I think, you probably -- seasonally, it's a little bit of a slower quarter, but something in the $350 area for volume typically?
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Yeah, I would guess it will be somewhere again in the $370 range on plywood volume and we may in reaction to what's going on in the pricing environment have some downtime particularly in the Pacific Northwest. So somewhere in the $350 to $370 area would be my guess on where we'll come out on fourth quarter volumes, and a little bit will depend on where we are on EWP production, because obviously we can produce EWP ahead of the time and put it in inventory, that's a better deal than trying to stuff plywood into the market between Thanksgiving and New Years. So again, I think the $350 or $370 range for volume have to run in the sensitivity and then relative to third quarter it's a guess at this point, but probably down $50 to $60.
Dan Hutchinson -- Executive Vice President-Wood Products
Yeah. Brian, this is Dan Hutchinson again. We have, as I stated earlier, really good inventory position at the mills on LVL. So as Wayne pointed out, we'll be looking really closely at plywood prices and we have taken some modest market downtime really based on pricing quite frankly, and we'll continue to do so as we roll through the quarter.
Brian Maguire -- Goldman Sachs -- Analyst
Great. That's helpful. Switching over to input costs, I think, we've probably seen some relief in Western log prices and I know there's a little bit of a lag in the OSB cost kind of flowing through. Just wondering if you saw any benefit in 3Q there or you'd expect to get some starting in 4Q from those factors?
Dan Hutchinson -- Executive Vice President-Wood Products
This is Dan again. We have seen some reduction in log costs in the Pacific Northwest. Unfortunately, you won't see as much of that show up on the income statement as you might think, because we have relatively expensive logs in our log decks. We also have purchased timber under contract or tuck, we historically do, which is relatively expensive. So I think the log costs will come up, you will not see that impact as greatly as you might think on our financial statements. And as Wayne pointed out to me the other day, it hasn't fallen -- the log costs haven't fallen nearly as fast as the plywood price, so. But we do think that it's peaked out in the Northwest and we're starting to see it come off. And we're also starting to see some reductions in the OSB or our web price for OSB is coming up also.
Tom Corrick -- Chief Executive Officer
I would note that we're also seeing similar sorts of reductions for lumber both for I-joist plant in Canada and our GLULAM plant in Idaho.
Brian Maguire -- Goldman Sachs -- Analyst
Okay. Just last one from me, just thinking about EWP prices, I know it's not a direct correlation to lumber price, but there are some applications whether substitutes. Just wondering with the sharp fall in lumber prices, do you expect EWP prices to come under some pressure and I think those are usually annually set, so wouldn't expect anything in '18, but as you're kind of looking ahead to '19 should we be worried about EWP pricing?
Dan Hutchinson -- Head-Wood Products Operations
Dan again. Clearly, there is a substitutional opportunity in some of those situations, but as you stated, that tends to be a -- doesn't fluctuate like these other commodity prices. If we continue to see downward pressure or lumber stays where it is, it will certainly make -- it will make the conversations more challenging, but right now, we're not anticipating a significant change in the EWP price.
Tom Corrick -- Chief Executive Officer
Yeah. And this is Tom Corrick. I would add that the I-joist product line has become pretty mature and the users of I-joist tend to be users of I-joists and the users of lumber tend to be users of lumber. And the other thing I would note is that the supply chain on the EWP side is different than probably what we've seen on the lumber side or the OSP side where there have been some pretty significant capacity additions. And supply was quite tight last year and if we continue to see even slight growth in the housing and I think the supply demand situation is going to remain quite tight, which will obviously have an impact on pricing.
Brian Maguire -- Goldman Sachs -- Analyst
Okay. Appreciate the comments. Thanks.
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Thanks, Brian.
Operator
Thank you. And our next question comes from Chip Dillon with Vertical Research. Your line is now open.
Chip Dillon -- Vertical Research -- Analyst
Yes, hi. Good morning, Wayne and Tom.
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Good morning, Chip.
Chip Dillon -- Vertical Research -- Analyst
You mentioned that you would be taking the charge, I guess, in the fourth quarter for the Roxboro shutdown. Could you talk a little bit about what kind of range that could be? And is it fair to say that's roughly half of the facility in terms of maybe the employment or the amount of wood you put through there or what proportion is that roughly?
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
So Chip, this is Wayne. We are going to take a $60 million charge approximately in the fourth quarter and the vast majority of that all the couple of million bucks will be depreciation. We do anticipate some severance, there's slightly over 50 employees that we anticipate being impacted and there is probably more employees on the LVL side than on the I-joist side, but obviously we have some salaried folks and some other people that we would like to retain and either keep at Roxboro or move to other facilities. So we're working through that announcement at the facility this morning. But in terms of the investment that we had on both for Roxboro, the LVL and related assets represents about three quarters of the investment at Roxboro.
Chip Dillon -- Vertical Research -- Analyst
Okay. And then, in terms of the equipment, are you building in some kind of, I guess, salvage value or are you expecting to remove that equipment and either sell it to someone or move it to another place?
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Yeah, I think what we're going to do in 2019 is, we will look at for the LVL assets in the veneer production assets, we'll look at whether or not we can remove those cost effectively, if we can scrap them out at a cost that's reasonable, and free up the building footprint and the outdoor storage footprint. We'd move in that direction if it's cost prohibitive or uneconomic to do that given demolition cost and scrap prices, then we'll essentially leave them in place, but that the plan over time would be to remove those assets from the site and free up more space for the I-joist line and to use it for storage and potentially look at expanding production on I-joist in the future.
Tom Corrick -- Chief Executive Officer
Chip, this is Tom. I would just add that the bulk of the activity in the mill has been around the LVL process and we'll be bringing billets in from our Thorsby, Alabama mill with the I line there.
Chip Dillon -- Vertical Research -- Analyst
Okay. That's helpful. And then, the lumber mills you sold which seemed pretty good timing there, were those mills assets you were planning to sell anyway at some point, you took advantage of the strong market over a few months ago or what was your thinking behind those divestitures?
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Chip, this is Wayne. We have been looking at our asset footprint and things that align with where we're trying to hedge strategically. We're clearly reinvesting in and setting up to be very low cost facilities. In the case of the two lumber operations and the particleboard operation in Northeast Oregon, those were not mills that were going to get strategic reinvestment for us. And if you looked at it year-to-date, it's about $66 million in revenues out of those three facilities and basically breakeven on an operating income basis. And Woodgrain is a vertically integrated Millwork producer that's in the region and we think there are much more logical owner for those assets, and frankly, they've been a customer for a number of years. And so this trade, we think, is beneficial for those mills. And if they can be successful with them, it's to our advantage, because we'll still have the plywood operation in Elgin, Oregon and we're going to cooperate on timberland procurement and other factors. So it's really a question of where we want to allocate strategic capital going forward. And as I say, in our case, it's toward the veneer operations that support plywood and EWP, and growing the Distribution business.
Dan Hutchinson -- Head-Wood Products Operations
And also in that region -- Chip, sorry. This is Dan again. We'll continue -- that region also included our I-joist -- our GLULAM facility at Homedale, and we will retain that also. So we retain the plywood facility and the GLULAM facility.
Chip Dillon -- Vertical Research -- Analyst
Okay, that makes sense. And then just as we think about the fourth quarter, just for modeling, it seems like that -- like we saw, for example, in 2016 when we had a bit of a downdraft that if I just look at your plywood guidance and what typically happens when you have to mark things in the distribution business, I'm pretty sure you're saying it's going to be tough to breakeven on the EBIT line in the quarter. Would you agree with that?
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
In Wood, I would probably agree with that. I think in BMD, we could end there as well, although it will be a lot dependent on what happens as we go into December on price. I would tell you, based on what we've seen in October, we're going to have significant margin pressure in the month of October, probably not generate a lot of EBITDA in distribution and obviously, we are buying inventory as prices were falling through October that we haven't turned yet that will end up selling in November; and unless prices move up, we'll have margin compression in November in distribution. So I think you're caution is right. It could be tough to get to breakeven on an EBIT basis in each of the businesses in the fourth quarter.
Chip Dillon -- Vertical Research -- Analyst
Okay. That's very helpful. Thank you.
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Thanks, Chip.
Operator
Thank you. And our next question comes from Reuben Garner with Seaport Global Securities. Your line is now open.
Reuben Garner -- Seaport Global Securities -- Analyst
Thanks. Good morning, guys. I want to try to make sure I understand the impact of deflation on you guys more so looking out to next year than Q4. Can you help us with a -- how do you think about a decremental margin on price in the -- I'm talking about BMD, specifically, how do you think about a decremental on price declines. And then in that same line maybe what the impact of deflation will be on your working capital for next year?
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Reuben, this is Wayne. Let me take the working capital one, because that one's easier. What we've said on the way up is, as our sales grow, we plan about 10% of the sales growth falling in the working capital, and I would expect the inverse to be true. We will get some working capital benefit although, I expect most of that to show up by the end of this year as receivables and inventory values come down and then the other thing that happens is commodities typically have much shorter payables terms.
So when we get a ramp-up in commodity prices, the inventory we only get about 10 or 11 days terms on commodities versus on a lot of the general line products, it's 30 days. So I think if you look at our payables to inventory ratios, it will go back to a more normal level as we get toward year-end. As far as a decrement from deflation, I mean, obviously, we still have all of the same activity costs associated with shipping OSB or lumber if it sells at a lower price, and typically, what happens is our gross margin percentage will creep up slightly as prices fall other than the decline in price, but if you got prices stabilize, let's say $250 versus $400 for OSB, we would typically get a higher percentage gross margin at $250, that would generate similar gross margin dollars to cover the operating costs. But in terms of deleveraging, I would expect that as we lose sales from deflation, that you're probably looking at a drop-through on EBITDA somewhere around 4%.
Reuben Garner -- Seaport Global Securities -- Analyst
Okay, very helpful. And then a lot of moving parts with the investments you guys are making in the facilities, the sales from assets and the closure of Roxboro or part of Roxboro, at least. Can you talk about maybe altogether, what all this could mean from whether just savings or just a profit improvement opportunity for 2019 relative to 2018. It's just putting all these different pieces together, what's the big picture opportunity for 2019?
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Okay. Well, let me start in wood, and again, I don't have a crystal ball. I think if you compare 2019 to 2018, the two major moving parts are going to be commodity pricing for plywood, and ultimately, what happens on our input costs. In the plywood, it's pretty easy to calculate just take the volume times whatever price variance and where you think prices are going to settle out. We've said over time we think plywood probably ends up at a trend price of somewhere around $295 on a 3/8 basis, and obviously, we spent a lot of 2018 well above that. So I would expect the negative price variance next year barring a strong rebound in housing.
As Dan said, we would expect log cost in the Pacific Northwest to moderate. We haven't seen price inflation on log cost in the South for a considerable period of time. And given the growth to drain ratios and inventories in the South, we're not expecting any log cost pressures in the South. Part of it is, scale of our operations in the Northwest and just where log prices are, the majority of our log costs are in the Northwest, even though the actual production is split pretty evenly between the South and the Northwest, we pay more for logs in the Northwest than we do on an aggregate basis in the South.
We will get some relief on web-stop (ph) cost for I-joist relative to where we are in 2019. So I think that's a positive for wood. We'll avoid the EBITDA losses we've had at Roxboro. And then, as we said, the three operations we had in Northeast Oregon were essentially breakeven or slightly positive on an EBITDA basis. And really the divestiture in Florien (ph) Northeast Oregon and the closure of Roxboro, they will obviously, particularly with the Roxboro write-off, help our return on invested capital. And one of the things, we're very focused on in both businesses is free cash flow return on investment. And then wood, I think, the steps we've taken and the actions we're doing on the reinvestment into Chester and Florien will clearly help our return on investment in the wood business over time.
Tom Corrick -- Chief Executive Officer
Now the projects at Florien and Chester, the real benefit of those projects is going to show up, just given the timeframe to get them completed in more in 2020 than 2019.
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
And then in distribution, I think in the first half of the year, I mean, barring some very unusual events, I'm expecting price deflation to make topline revenue comparisons and operating expense leverage challenging. Having said that, if we finished the year kind of where we are on pricing, I think, the odds of BMD having some periods of tailwinds on escalating commodity prices in 2019 are probably there. But I think you'll see challenging topline comparison as an expense leverage comparisons in the first half of the year, but I think BMD's got a legitimate chart to be flat to up for the full year, just given the, in some ways the beating we've taken on falling commodity prices since mid-June. I think it's going to be a difficult comparison first six months and probably housing continues to recover at a modest pace, we'll have pretty good comparisons in the back half of 2019.
Reuben Garner -- Seaport Global Securities -- Analyst
Great. Thanks, guys.
Operator
Thank you. And our next question comes from Kurt Yinger with Davidson. Your line is now open.
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Good morning, Kurt.
Kurt Yinger -- D.A. Davidson -- Analyst
Yeah, good morning, everyone. My first question, Wayne, I don't know if I missed this, but could you talk about how much the non-cash impairment charge was and did that flow into the roughly $14 million EBIT number for Wood Products?
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Yeah, in Wood Products, there would have been $11 million, that was included in their numbers. And of that $11 million, $10.4 million was non-cash and the other $600,000 was related to severance and other transaction costs. And then in the corporate there would have been -- in the unallocated corporate, there would have been $11.3 million related to the pension settlement on a pre-tax basis.
Kurt Yinger -- D.A. Davidson -- Analyst
Okay. And so with the pension, I assume, being done in the third quarter, I mean, is that sort of an $8 million charge per quarter going forward you think?
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
No. What we did is we did two pension risk transfers with Prudential where we handed off retiree liabilities and assets to Prudential under a group annuity contract. So we've gone from lastly $500 million in pension liabilities to about $170 million or $180 million, and adversely we measure that at December 31st. What we have remaining in our pension plan is people that effectively haven't reached payout status yet. And we have now over 80% of the assets and duration match fixed income, so with the 20 million contribution we did take advantage of 2017 tax rates were essentially fully funded and we moved the portfolio very heavy duration matched fixed income. So we've effectively neutralized the pension risk for the Company going forward and we should have minimal pension expense in 2019 and very, very little volatility in our funded status regardless of what happens in capital markets.
Kurt Yinger -- D.A. Davidson -- Analyst
Okay. That makes sense. Thanks, Wayne. And then, my last question was just higher level. Could you guys maybe talk about your views on the response from the industry, whether it'd be plywood or lumber, the declines we've seen. Seen some curtailment announcements already, you've talked about a little bit of market-related downtime, do you think those are more log cost pricing or just better discipline running to orders?
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Yeah. I think what you're seeing a little bit is a short-term mismatch between supply and demand. And if you covered up the pricing chart, the first five months of the year, the pricing levels we have today are probably a little bit below where we would think things would normalize, but it's really returning to cost curve where the marginal guys cash breakeven. So we think if we get a demand response next year with improved housing, you'll probably get a good balance on supply and demand. But I think we would view a good portion of the price decline was returning to more normalized cash margins for OSB, dimension lumber, and frankly, for plywood.
Tom Corrick -- Chief Executive Officer
And I would note that a huge driver in that return was the fact that early in the year for a multitude of reasons, some start-up issues, freight issues, probably two-lien inventories going into the new year, really very little bad weather impacting housing starts, there were a whole bunch of factors that really created kind of the reverse where we had a pretty good demand and some really serious supply constraints that I think drove a lot of that price increase. And as those things got fixed, we actually kind of overshot the mark in the other direction. And I think the pricing we've seen in the last three, four months is a direct result of that.
Kurt Yinger -- D.A. Davidson -- Analyst
Right. I guess, my last question is, we've heard some anecdotes, the trucking has been a bit better, but I mean if we get a seasonal rebound in demand in the first part of 2019, I mean, do you think the freight and logistics aspect is going to be much better next year than this year?
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Well, I think, the issue is right now, to Nick's point, if you look at the supply chain, the demand is OK, but it's not particularly strong. And I think, right now, throughout the supply chain, people are pretty catalyst in terms of that. Joint-lead inventory in ground at risk of supply constraint. So I think you probably got maybe two weeks on order files and people are pretty confident that if they call them, they need product in 10 days, they can get it and the price is going to be what the price is going to be. I think if we had an unusually warm winter and building activity was more robust than expected in February and March, there's not really a lot of slack product sitting in the supply chain and I think you could get a decent rally in the second half of first quarter, if building activity is there, because I just don't think there's enough shock absorber in the supply chain to cover it. But again, right now, I think most of the people on the buy side are not feeling like they're at any risk of price escalation and there's pretty good availability on products though you have kind of the normal replenishment. I don't see anybody who's trying to buy ahead and feeling like there's going to be supply constraints whether there going to be short inventories, but that can change literally within a couple of weeks.
Tom Corrick -- Chief Executive Officer
I would note that and not that to make any future predictions about the performance, but two of the large railroads had some really serious operational issues in the first four, five months last year. And obviously, if they can avoid repeating that, that'll have an impact as well.
Dan Hutchinson -- Executive Vice President-Wood Products
Yeah, this is Dan. When we think about trucking going into 2019, I don't have any reason to believe, at least, from the Wood Products side that it's going to be improved. I think, we're going to be challenged like we were this year. I would also note that I think that we handle it quite well and we were able to get our products from our mills to our customers. I think, the UP, I believe, is doing what the CSX did relative to realigning their operational strategy. I don't know how that's going to pan out, but I suspect it's going to cause some challenges in the system.
Kurt Yinger -- D.A. Davidson -- Analyst
All right. Thanks for the color. Good luck in the fourth quarter.
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Thanks, Kurt.
Operator
Thank you. (Operator Instructions) And our next question comes from Mark Wilde with Bank of Montreal. Your line is now open.
Mark Wilde -- Bank of Montreal -- Analyst
Thanks. Good morning, Wayne. Good morning, Tom.
Tom Corrick -- Chief Executive Officer
Good morning, Mark.
Mark Wilde -- Bank of Montreal -- Analyst
I wondered if we can just come back to kind of log cost for just a minute. It sounded like the commentary you had about the Pacific Northwest log suggested you were both curing log inventories and you may have bought stumpage at higher prices. So that it -- there may be a real lag between one, we see log prices fall when your log costs actually fall, am I reading that correctly?
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Yeah, Mark, this is Wayne. Typically what we do if you look across the season and this time of year, we will build log decks in the Pacific Northwest, because we have lot of areas that can get snowed out or in the spring we'll get breakup as the roads buyout or if we get rains. And so what we found over the years is if we put logs on the ground late in the year, we can be selective buyers in the first quarter and avoid in certain years sharp increases in spot market prices if availability gets tough.
But one of the things we do as a background to all that is we typically keep timber under contract where we've bid on state and federal sales that represent roughly 30% of our wood needs. So that if we see spikes in the spot market, we can stop periodically rely on our log decks and we can rely on the spot market to a lesser degree and try to opportunistically play in the spot market and you look at what happened in the first half of 2018, a lot of the timber bids were at elevated prices, reflecting what was going on with dimension lumber and what was going on with exports.
And it's not going to represent obviously 100% of our wood needs, but timber under contract typically has to get cut out in 18 to 36 months and we bleeded in along with spot market purchases. So I think if you said well spots off 25% in 2019, how come your log costs aren't down. We will have logs that are in our log decks for 2018 and we'll have part of this timber under contract that we'll harvest and bring in. And so you may see 10% or 15% decline in log cost as opposed to 20 or 25 if dimension continue to stay soft and spot market prices came down.
Mark Wilde -- Bank of Montreal -- Analyst
Perfect. That's exactly what I was looking for there. And then, it sounded like you're pretty comfortable with your log cost outlook down in the South. I'm just curious, now that log markets are very localized and there are some parts of the South where we're seeing a lot of increase in both sawmill capacity and even some engineered woods capacity additions. So could you just talk about your particular baskets and what you're seeing?
Dan Hutchinson -- Executive Vice President-Wood Products
Yeah, Mark, this is Dan. You're right that depending on what's happening, they're regional log baskets and there are some situations in the South, where larger mills have been put in, have put a little bit of pressure on it. But our facilities are located in really robust log markets and we -- I don't see anything that's going to impact us in 2019 relative to log cost in a significant way in the South. That doesn't mean that something might not happen going forward, but that could have some impact on that.
Tom Corrick -- Chief Executive Officer
Couple of things I would say, Mark. One is, in our plywood operations we tend to use a larger log that is not one the sawmill guys focus on; they have a hard time recognizing value out of it. And the other thing I'd say is even in log markets where there's a lot of incremental capacity going in, what you're really talking about is a freight play. I was looking at the forest inventory data for the forest service the other day, and in 2016 the growth in the Southeast exceeded the harvest in the entire United States. So there is clearly a gap between supply and demand for logs in the South right now.
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Yeah, Mark, to give you -- just to give you a little bit of data on the Southern operations in the one that we consider in the East in the Carolinas, those year-to-date 2017 compared to year-to-date 2018, zero change in delivered logs at the gate. If you look at the Pacific Northwest, on a year-to-date basis, log costs were up 21%.
Mark Wilde -- Bank of Montreal -- Analyst
Okay. That's helpful. And the last thing I wondered is just from a distribution standpoint, can you maybe provide even a little more color on how you guys read the housing market based on what flowing through distribution and also maybe address the issue of whether you think we've hit a bottom in the lumber market? There seems to be a lot of speculation over the last few days that maybe lumber has bottomed and is primed for a bounce there.
Nick Stokes -- Executive Vice President-Building Materials Distribution
Mark, this is Nick. On the expectation of the pricing market, we have seen some commentary by some of the producers over the last week to 10 days that indicate that they don't expect prices to recover to the higher levels of 2018 in the next two months. I think that's a --
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
We won't name names of who said that on their earnings call.
Nick Stokes -- Executive Vice President-Building Materials Distribution
I think that's a bit of an outlay, but I would tell you that, to some degree customers have been more willing to buy in the week to 10 days and that doesn't mean we've hit a bottom, but there are some confidence out there that probably hasn't existed three weeks ago. I think the backdrop is these supply increases as they come on, and we're obviously steering down the roads of winter and we'll just see how severe it is.
Our expectation is that it's going to -- we're close to some settlement area, I won't say bottom, but settlement area, but we don't anticipate a lot of upside in the next 30 days. Having said that, I might have said the same thing a month ago. And if we experienced the price erosion in November and December that we did in August, there's going to be a pretty dower Christmas Eve night where everybody gets cold in their stockings, so we'll see how it goes.
As to the housing deal, we don't have a lot of visibility than anybody else does in terms of housing. I would tell you that what our retailers tell us is that pretty sporadic some places there's still lot of activity and pent-up orders that they're waiting to fill; in other cases, it's slowed down.
Tom Corrick -- Chief Executive Officer
I would -- Mark, this is Tom. I've reached out to our national accounts people on the manufacturing side. Basically what we are in general hearing is that builders are talking about moderating their growth forecast for next year, but we're not hearing anyone say that they think their starts will be flat or down.
Mark Wilde -- Bank of Montreal -- Analyst
Okay. That's helpful. The last question I had Tom is, I think, there are some plywood assets for sale in the South. From everything you had said over time, it doesn't sound to me like you feel the need to buy more plywood or veneer. Am I correct about that?
Tom Corrick -- Chief Executive Officer
I think, Mark, with the recent projects that we're looking at in Chester and Florien will be in very good shape on self-sufficiency and I don't see us making an investment to go into plywood for plywood's sake, it's always clearly going to be tied to our EWP strategy. So I think it's very unlikely we'd do an acquisition in that space.
Mark Wilde -- Bank of Montreal -- Analyst
Okay. That's helpful. Good luck.
Tom Corrick -- Chief Executive Officer
Thank you, Mark.
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Thanks, Mark.
Operator
Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. Tom Corrick for any closing remarks.
Tom Corrick -- Chief Executive Officer
Thank you, Lauren. Obviously, we had a challenging third quarter. However, I'm pleased with the progress we've made during the quarter and during 2018 on a number of fronts. We continue to focus on strengthening our strategic position. The BMD has done quite a bit of geographic infill this year with acquisitions in Nashville and Medford, and the upcoming acquisition in Cincinnati.
I'm really, really pleased that we're taking the final steps to complete the modernization of our plywood operations in the Southeast with the work at Chester and Florien that we started in 2015, and we continue to rationalize our operations to focus on our core businesses and assets with the sale of the Northeast Oregon mills and the announced closure of the Roxboro LVL line.
I think also we've done all this in a situation where we've really been able to strengthen our financial position to fund growth going forward and we're sitting on $577 million of liquidity, we have a very conservative debt position, we fundamentally have our pension funded and we did all that -- even as we did all that, we were able to return cash to our shareholders. We're facing a challenging environment in this quarter, but I'm really confident about the future given our many recent actions to strengthen the Company and to drive additional value for our investors.
And with that, I'd like to thank everybody for calling in and I hope everyone on the line enjoys a great holiday season.
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Thank you, Lauren.
Operator
Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone, have a wonderful day.
Duration: 53 minutes
Call participants:
Wayne Rancourt -- Executive Vice President, CFO and Treasurer
Tom Corrick -- Chief Executive Officer
Molly Baum -- Bank of America Merrill Lynch -- Analyst
Dan Hutchinson -- Executive Vice President-Wood Products
Nick Stokes -- Executive Vice President-Building Materials Distribution
Brian Maguire -- Goldman Sachs -- Analyst
Dan Hutchinson -- Head-Wood Products Operations
Chip Dillon -- Vertical Research -- Analyst
Reuben Garner -- Seaport Global Securities -- Analyst
Kurt Yinger -- D.A. Davidson -- Analyst
Mark Wilde -- Bank of Montreal -- Analyst
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