Boise Cascade (BCC) Q4 2018 Earnings Conference Call Transcript

Boise Cascade (BCC 1.17%)
Q4 2018 Earnings Conference Call
Feb. 26, 2019 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Operator

Good morning. My name is Victor, and I will be your conference facilitator today. At this time, I'd like to welcome everyone to Boise Cascade's fourth-quarter 2018 conference call. [Operator instructions] Before we begin, I remind you that this call may contain forward-looking statements about the company's future business prospects and anticipated financial performance.

These statements are not guarantees of future performance, and the company undertakes no duty to update them. Although these statements reflect management's expectations today, they are subject to a number of business risks and uncertainties. Actual results may differ materially from those expressed or implied in this call. For a discussion of the factors that may cause actual results to differ from the results anticipated, please refer to Boise Cascade's recent filings with the SEC.

It is now my pleasure to introduce you to Wayne Rancourt, executive vice president, CFO, and treasurer of Boise Cascade. Mr. Rancourt, you may begin your conference.

Wayne Rancourt -- Executive Vice President, CFO and Treasurer

Thank you, Victor. Good morning, everyone. I'd like to welcome you to Boise Cascade's fourth-quarter 2018 earnings call and business update. Joining me on today's call are Tom Corrick, Nate Jorgensen, Dan Hutchinson and Nick Stokes.

Turning to Slide 2. I would point out the information regarding our forward-looking statements. The appendix includes reconciliations from our GAAP net income to EBITDA and adjusted EBITDA. I will now turn the call over to Tom.

Tom Corrick -- Chief Executive Officer

Thank you, Wayne. Good morning, everyone, and thank you for joining us today. I'm on Slide 3. Before we move into the financial results from the fourth quarter and the full-year 2018, I would like to take a few minutes to recap our strategic objectives and the progress we've made on those longer-term objectives in 2018.

In Wood Products, our primary objective is to grow our market position in engineered Wood Products as we believe we have an industry-leading manufacturing and distribution capabilities to support our existing customers that address additional end markets. Continued success in manufacturing will be dependent upon driving operational excellence across our system. In BMD, we are continuing to expand our market share in existing geographies by expanding our product lines and through expansion of customer segments. BMD also continues to look for growth with infill expansions.

Moving to Slide 4. We made solid progress in 2018 advancing our strategic position. Our operational excellence and reliability efforts are gaining traction at a number of manufacturing locations, but we clearly have more opportunity in front of us. We have embarked on major capital upgrades at our Chester, South Carolina and Florien, Louisiana plywood operations to lower our cost of veneer production and continue to support our growth in EWP.

We also took a number of steps in Wood Products to rationalize our footprint by selling or closing mills where the operations did not fit with our strategy or we concluded the operation would not generate an appropriate return on capital over time. I am proud of the way our Wood Products team worked through the rationalization process and mitigated the impact on our employees and communities. The distribution team had a terrific year, growing market share organically and completing three infill acquisitions. I'm extremely pleased that we were able to bring high-quality, high-integrity distribution organizations into the BMD family and strengthen our geographic coverage.

In each acquisition, we had a long-standing commercial relationship with these organizations on engineered Wood Products, and we were confident they would fit well within our culture. At the corporate level, we also made significant progress reducing our exposure to our legacy pension obligations during 2018. We completed two pension-risk transfer transactions with Prudential Insurance, which eliminated over 60% of our pension liabilities. The company contributed $20 million to the remaining pension plan to take advantage of 2017 federal tax rates and minimized our future pension investment exposure by reallocating assets to a liability hedging fixed income strategy.

The actions in Wood Products, along with the pension risk transfers, led to a number of earnings changes in 2018, which negatively impacted our reported results. However, I am very pleased with how we've positioned the company for 2019 and beyond. On Slide 5, I want to take a minute to review a number of management changes we recently announced as part of our succession planning process. On January 18, our board promoted Nate Jorgensen to chief operating officer.

In the past, the company has used the COO role as a development step to the chief executive officer position. Nate joined Boise Cascade in 2015 and has been leading our EWP efforts for the last several years. He has over 32 years of experience in our industry, including leading the wholesale distribution operations of one of our competitors. I would note that I'm only 63 years old, and I'm not planning to go anywhere soon.

Mike Brown will take over leadership of our Wood Products business as Dan Hutchinson retires. Mike has done an excellent job as head of Operations in Wood Products since 2015, including driving significant progress in safety performance. Erin Nuxoll was promoted to senior vice president and will be leading our Human Resource efforts as John Sahlberg retires. Erin rejoined Boise Cascade in 2016, following 10 years as SVP HR for a large multinational company based in Boise, Idaho.

Jill Twedt, our vice president of Legal, was promoted to general counsel and will be leading our legal department. Jill joined the company as a senior counsel in 2007. I know this is not the typical introduction to an earnings call, but I felt it was important to recognize the management bench strength we have in place as we move forward. I also want to thank Dan and John for 39 and 37 years of service, respectively.

They have been incredible colleagues and leaders for the company over several decades. Moving to Slide 6. Our fourth-quarter sales of $1.1 billion were down 2% from fourth-quarter 2017. Our net loss was $72.7 million or $1.85 per share, compared to net income of $19.1 million in the year ago quarter.

Reported net loss for fourth quarter of 2018 includes $55 million and $2.8 million of pre-tax accelerated depreciation and other closure-related costs, respectively, or $1.11 per share after-tax due to the permanent curtailment of LVL production at our Roxboro, North Carolina facility. Fourth-quarter 2018 also includes $24 million of pre-tax charges or $0.46 per share after-tax related to the pending sale of our hardwood plywood facility in Moncure, North Carolina. Our Wood Products manufacturing business reported a segment loss of $86.6 million in the fourth quarter compared to $6.8 million of segment income in the year ago quarter. The fourth-quarter 2018 results include the Roxboro and Moncure charges.

Our Building Materials Distribution business reported segment income of $8.9 million on quarterly sales of $922 million for the fourth quarter, compared to $22.9 million of segment income on quarterly sales of $932 million in the comparative prior year quarter. Wayne will walk through the financial results in more detail, and then I will come back to provide our outlook before we take your questions.

Wayne Rancourt -- Executive Vice President, CFO and Treasurer

Thank you, Tom. I'm on Slide 7. Wood Products sales in the fourth quarter, including sales to our distribution segment, were $307.1 million, down 7% from fourth-quarter 2017. Excluding the charges related to the Roxboro LVL curtailment and the asset impairment at Moncure, Wood Products had an EBITDA of $11.5 million in the fourth quarter of 2018, a decline of more than 50% from the $24.2 million reported in the year ago quarter, principally due to lower plywood pricing and higher log costs in the Pacific Northwest.

BMD sales in the quarter were $922 million, down 1% from fourth-quarter 2017. Sales prices declined 4%, which was largely offset by sales volume increases of 3%. BMD reported segment income of $8.9 million or EBITDA of $13.8 million. This compares to segment income of $22.9 million and EBITDA of $26.9 million in the prior year quarter.

The decline in income was driven primarily by a gross margin decrease of $7.6 million, resulting from decline in commodity prices in the fourth-quarter 2018 and a $6.4 million increase in selling and distribution expenses. The amounts for unallocated corporate costs and other items impacting our reported adjusted EBITDA can be found in the tables of our earnings release. The net of those items was negative $7.5 million in the fourth-quarter 2018 compared with negative $7.2 million in the fourth-quarter 2017. Turning to Slide 8.

Our fourth-quarter sales volumes for LVL and I-joist were down 11% and 15%, respectively, compared with fourth-quarter 2017. Based upon our EWP volume declines and industry data, we believe there was a reduction in supply chain inventories of EWP as housing activity moderated in the second half of 2018. Our full-year 2018 EWP volume growth was in line with housing starts growth. Pricing in the fourth quarter for LVL and I-joist was up 12% and 8% from the year ago quarter, reflecting price increase actions taken in early 2018.

Turning to Slide 9. Our fourth-quarter plywood sales volume in Wood Products was 326 million feet, compared to 347 million feet in the fourth-quarter 2017. The $306 average plywood net sales price in the fourth quarter was down 9% from fourth-quarter 2017. Plywood pricing is up slightly since the beginning of the year at levels below our fourth-quarter average.

Moving to Slide 10. BMD's fourth-quarter sales were $922 million, down 1% from fourth-quarter 2017. By product area, BMD sales of commodity products decreased 10%, general line products increased 10% and EWP sales increased 5%. Gross margin percentage for BMD in the fourth quarter was 10.9%, down 70 basis points from the 11.6% reported in the fourth-quarter 2017.

The gross margin decline was a result of the commodity price declines in fourth-quarter 2018. BMD's EBITDA margin was 1.5% for the quarter, down from the 2.9% reported in the year ago quarter. On Slide 11, 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 $26.9 million during the fourth quarter.

Accounts receivable, inventory and accounts payable all decreased with the seasonal deceleration of sales and purchases. The statistical information filed as Exhibit 99.2 to our 8-K has the receivables inventory and accounts payable detail broken down by segment for those that are interested. I'm now on Slide 12. We finished fourth quarter with $192 million of cash.

Our total available liquidity at December 31 was approximately $556 million, which reflects our cash and availability under our committed bank line. We repurchased 200,000 shares of stock in the fourth quarter at an average price of $24.65. In total, we returned $55.5 million to shareholders in 2018 through a combination of dividends and share repurchases. Our capital spending, excluding acquisitions, is expected to be between $85 million and $95 million this year as we execute strategic projects at our manufacturing operations in Chester, South Carolina and Florien, Louisiana.

Despite the unusual book tax rate in the fourth quarter of 2018, we continue to expect our effective book tax rate to be approximately 20% going forward. I will turn it back over to Tom now to discuss our outlook.

Tom Corrick -- Chief Executive Officer

Moving to the outlook on Slide 13. The modest increase in housing starts in 2018 was partially offset by a decline in the median single-family home size, so we did not get much of a product volume tailwind last year. The February consensus estimate for 2019 U.S. housing starts is 1.27 million, which is essentially flat with 2018.

Actually, based on today's number, it's a little bit higher. We believe important economic drivers behind the demand for new construction like job formation remain in place. However, affordability issues in many metropolitan areas, mortgage rate volatility and availability of construction labor are all influencing the pace of activity. While we believe housing starts could reaccelerate in the second half of the 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. The BMD team continues to make good progress on seeking acquisitions in targeted geographic markets, looking at product line extensions and pursuing other avenues to push up sales and earnings. 2018 was a challenging year with the unusually volatile ride on commodity pricing. I'm proud of how our business has executed for our customers in that environment and the progress we've made as a company in pushing our strategy forward.

We would welcome any questions at this time. Operator, would you please open the phone lines? 

Questions and Answers:

Operator

[Operator instructions] And our first question comes from the line of George Staphos from Bank of America.

John Babcock -- Bank of America -- Analyst

This is actually John Babcock on the line for George. Just wanted to start out, I mean, you talked at the end there about the housing starts data for the end of the year. Just wanted to get your take on that and how that compared to your expectations heading into the quarter? And also, just generally, how the housing market feels to you right now?

Wayne Rancourt -- Executive Vice President, CFO and Treasurer

John, this is Wayne. I'll start and let Corrick jump in, but I think our general sense is that builders are looking for '19 to be flat, and we would expect single-family to be up maybe very modestly. I think we'll see -- continue to see fair amount of volatility in the multifamily space. And so as we're planning for '19, we think volumes are going to be fairly consistent with the volumes we saw in '18, unless there's an unexpected shift in the mix between single and multi.

So we're going into the year planning volumes to be pretty consistent and any growth we get in single-family starts we think will be offset by moderately smaller average footprint on the single-family side.

Tom Corrick -- Chief Executive Officer

Yes. And John, this is Tom Corrick, and we were at the builders show last week and obviously, had a chance to sit down with quite a number of builders. I think the general theme we heard at this show was that the fourth quarter, particularly December, was very difficult that the tone and mood and traffic was better in the first quarter, but fantastic and certainly improving. And I guess, I would say that the clear theme we heard throughout was that people were looking at flats slightly up on starts, but clearly looking at smaller house sizes, looking at entry level and first move up homes as opposed to second move up homes as being kind of the sweet spot in terms of where they still saw a lot of activity.

John Babcock -- Bank of America -- Analyst

OK. And then in the plywood market, I mean, how does that -- how tight is that market right now and what the latest you're seeing out in Brazil?

Wayne Rancourt -- Executive Vice President, CFO and Treasurer

John, this is Wayne. Brazil was actually down in December and that I would tell you, and I'll let like Dan jump in. I don't think Brazil is the No. 1 influence at the moment.

I think the overhang in the OSB is probably more of a concern in terms of the demand side for plywood. We saw in '17 and certainly, in the first half of '18 a lot of reverse substitution back in the plywood as OSB was in tight supply and had longer lead times. And I think with supply coming into better balance in OSB, some of the demand that would be out of the normal use for plywood has fallen back. And at this point, we're seeing reasonably good balance in the plywood market, but we're certainly not getting that tightness we had in the first half of '18 that was more of a factor of what was going on in OSB than the fundamental plywood markets.

John Babcock -- Bank of America -- Analyst

OK. And then just last question before I turn it over. Just can you comment at all on the lumber and particle board facilities and ultimately, what contribution that had to earnings, if much at all?

Wayne Rancourt -- Executive Vice President, CFO and Treasurer

So if you look at the operations we divested in total, and I'm going to throw Moncure into that because we expect that to close in the first quarter of this year, we think those operations in total were about EBITDA neutral and it will take about $120 million of revenue out of the Wood Products segment in '19. And there's more detail in our 10-K specific around operations in northeast Oregon. But I think if you take out $120 million in sales and assume that there was very little EBITDA from the divested operations, you'll be close.

Operator

And our next question comes from the line of Brian Maguire from Goldman Sachs.

Brian Maguire -- Goldman Sachs -- Analyst

Congrats to everybody on their new roles. Just a question on inventories in the channel that you're seeing, I guess, particularly in the distribution segment. Obviously, they got pretty bloated there in the second half of '18. It took some time to work down, but just wondering how you'd characterize lumber, OSB, plywood.

Just wondering, what product inventories in your own channel and just kind of what you're seeing out there these days?

Nick Stokes -- Executive Vice President of Building Materials Distribution

Brian, this is Nick Stokes. I would tell you as we finished up 2018, particularly in the last half of November and through December, channels were unusually lean on the inventory side, both seasonally as well as just given the reaction and the expectation on the commodity pricing environment. I would tell you in the last six weeks, dealers have a little more confidence in the pricing environment and are seeing a little bit better activity. So I think some degree of the channel is a little bit better off in terms of inventory than it was two months ago.

I don't think it's heavy. And if anything, I think given the winter in certain parts of the country, it might be a little light, but that's -- I'd characterize that as normal and seasonal.

Brian Maguire -- Goldman Sachs -- Analyst

OK. Great. And then just on plywood, could you give a sense of where your realizations are today versus the average in the fourth quarter? I think you mentioned kind of 25% below a year ago, which is maybe sequentially kind of higher realizations are in -- are these prices that we're at or that we kind of bottomed out at pretty close to cash costs for you guys? And are you or anybody else you think contemplating any capacity reductions as a result of all this?

Dan Hutchinson -- Executive Vice President of Wood Products

So if you think about the plywood prices -- this is Dan Hutchinson. The plywood prices have started to pick up since the first of the year, although I would still say that they're quite low. We did -- in Q4, we did take some market downtime that I really can't speak to the industry and where everybody is on the cash cost curve.

Brian Maguire -- Goldman Sachs -- Analyst

OK. Great. And just last one for me. Tom or Wayne, any way to estimate what the operational and productivity savings could contribute to EBITDA in 2019? I know some of that will just come from some of the curtailments at Roxboro and some of the other efforts, but any way to kind of quantify what we might expect for kind of combined operational and productivity savings?

Wayne Rancourt -- Executive Vice President, CFO and Treasurer

Yes. This is Wayne. I'll jump in and then I'll let Dan talk as well. We've got improvement efforts under way that are kind of independent of the input costs, and I would hope that we would be maybe in the $10 million to $15 million range on that, assuming we can gain the traction we think.

On the input cost, I'll let you kind of put your own OSB price assumptions to it. But I think on the OSB side, we generally use about 1 square foot for every lineal foot of I-joist, so that's going to put our consumption somewhere in the 240 million to 250 million square feet as an input cost. And again, I'll let you put your own OSB cost to it. On southern logs, if you look at all-in delivered at the mill, we're seeing modest increases in some of the wood baskets where we operate.

And in the Pacific Northwest, we've seen spot log prices come off considerably from the highs that we were seeing in the spring of '18. But we typically buy forward a portion of our volumes that we use in the Northwest. So we always carry timber on our contract. And even with pricing moderating in the Northwest, we will see limited declines in our wood costs in the Northwest as we cut through contracted volumes that we put in place in the first half of '18.

So we will see some reduction in our wood costs in the Pacific Northwest, but I think it will be offset by some modest increases in wood costs in the south.

Operator

And our next question comes from the line of Ketan Mamtora from BMO Capital Markets.

Ketan Mamtora -- BMO Capital Markets -- Analyst

First question. And Tom, you talked a little bit about this toward the end of your prepared remarks, but can you talk a little more about some of the new products and product line extensions that you all are targeting out of your distribution centers?

Tom Corrick -- Chief Executive Officer

Sure. And then I'll hand it over to Nick, and he can provide, I think, a little bit more color. But I think that we -- as an example of something that we've gained a lot of traction in over the last few years is a pretty significant move into rebar. And obviously, that doesn't sound very exciting in terms of being a basic commodity, but it's proven to be a kind of product line extension for us.

We're also moving into in some respects with a lot of the products we currently produce, looking at new segments in terms of, for example, focusing on industrial markets, multifamily markets and also have made a pretty significant gain in the millwork side in terms of door assembly and outdoor shops. Nick, is there anything you'd like to add to that?

Nick Stokes -- Executive Vice President of Building Materials Distribution

Thanks, Tom. Ketan, I would describe the product mix as kind of evolutionary in nature more than revolutionary in nature. And it's a combination of product line extensions. For instance, one of our major supplier partner is introducing a relatively wide-spread series of products.

And so we're taking those on and are pretty excited about that. We have a composite decking supplier that has introduced a new product, and so we're eagerly involved in those kinds of things. And then it's the new stuff from branch A to branch B. And once in a while, there's some brand-new stuff that we try.

So there's not a single thing that is -- should drive your thinking. But just think about it as kind of a regular process of finding and introducing the products as they become available.

Ketan Mamtora -- BMO Capital Markets -- Analyst

Got it. That's very helpful. And then, Wayne, just going back to that question on log costs. So it does seem like because of the way kind of you enter into such contracts that you will not see much of a benefit even in sort of Q1 or Q2 in terms of lower Pacific Northwest log costs.

Did I get that correct?

Wayne Rancourt -- Executive Vice President, CFO and Treasurer

Yes. I would put it in -- and again, I'll invite Dan here. But I think I'd probably put it in three baskets. We've got our in hand log decks that are on the mill sites, where we maintain multiple weeks of logs in our yards.

We have timber on our contract that we're committed to buy at prices that were in effect when, in essence, we won those auctions, whether it was state or federal lands. And then we have some of the wood that we buy in the current spot market and some of it from private landowners. And so it's really blending all three of those together that get us to our log cost that we'd run through the P&L in any particular quarter. So our log costs don't move up and they don't decline as fast as what you see going on in the spot market that maybe referenced by some of the team as they report their public results.

Ketan Mamtora -- BMO Capital Markets -- Analyst

Got it. That's helpful. And then your balance sheet is in very good shape. Can you talk about your capital allocation priorities as you look out next 12 to 18 months? And just remind us, what is left on your buyback authorization?

Wayne Rancourt -- Executive Vice President, CFO and Treasurer

Yes. So in terms of priorities, first priority is obviously to support the organic growth in both of the businesses. And has -- Nick has done that in some cases by increasing real estate footprint. Obviously, tractors, trucks, replacing pavement, etc.

So that spending is high priority. We've got the capital projects that are going on at our Chester, South Carolina mill and in the Florien, Louisiana plywood operation and those are kind of above and beyond what would normally be the maintenance capital in Wood Products. Then in line, kind of, behind that would be the regular dividend, which we just increased at the end of last year to $0.09 a share per quarter. And then we continue to look for acquisitions in distribution that are going to be infill acquisitions.

And as you mentioned, our balance sheet's in really good shape. So if we have free cash flow as we move down that waterfall, then we'll look at share repurchases and/or some other way of returning capital to the shareholders. And at current time, we have about 500,000 shares left on our repurchase authorization, and we could obviously go back to our board at any time if we thought that was appropriate that we got just under 500,000 shares remaining on the current authorization.

Tom Corrick -- Chief Executive Officer

Ketan, I would also add that as we look at our cash position, one of the things we are evaluating is what we perceive as potential acquisitions in the pipeline and not to say much more on this. But right now, I do think we're in a little better situation in terms of where asset values are in terms of some of the things we're looking at. So we'll be factoring all those things and as we think about how to deal with the capital allocation stack.

Operator

And our next question comes from the line of Chip Dillon from Vertical Research.

Chip Dillon -- Vertical Research -- Analyst

I know when you guys came public, I think you had indicated sort of a goal of a mid-cycle EBITDA of around 250. And I think in the subsequent acquisitions, some of the assets actually you just divested, you saw that moving closer to 300. And I know pricing doesn't allow anything close to that. But I just wanted to know, with the footprint changes, is 250 a more appropriate number or have you kind of rethought what your current footprint can deliver? And I also want to know -- add to that that you did add to your BMD business, so that could certainly have raised the number as well?

Wayne Rancourt -- Executive Vice President, CFO and Treasurer

Yes. Chip, this is Wayne. I would -- we haven't thought about putting out revised guidance relative to what we did at the IPO. I think you've hit on the major issues.

If you take our distribution business, we're at or above the $4 million kind of gross revenue number we thought we'd be and we're doing a little bit better than the 3% EBITDA margin we thought we would be at. So I think you're right relative to the 120-ish, 130-ish kind of number we had for BMD. I would tell you that if we get back to, normalized housing starts at 1.4 million to 1.5 million BMD should be above the original guidance we have. On wood, obviously, we've had a very protracted recovery.

So if you said what's different from what we expected, I mean, obviously, we've exited some of the lumber businesses. We are out of the particleboard business. And frankly, the residuals business is different than what it was eight or nine years ago as communication papers have declined. So in Wood Products, if you looked at what mid cycle earnings are, I would tell you they're probably lower in terms of expectations.

Part of it is the capacity removals as we've sold or closed locations. And part of it is we originally expected the recovery to be steeper than it's been. And I would tell you that with completion of the Martco, Corrigan operation and more OSB capacity getting restarted, we probably don't see the stability in panel pricing that we would have expected back in 2013 or even as late as '15 and '16. So I think the plywood earnings component is probably the one that's at most risk relative to where we thought we would be at mid cycle.

So this has just taken a lot longer to get there. And with the expectations at housing starts planned out at 1.3, it's going to be harder to get the margins in panels that we thought we would've had.

Chip Dillon -- Vertical Research -- Analyst

OK. Go ahead.

Tom Corrick -- Chief Executive Officer

Chip, I think -- Chip, this is Tom. I think one of the key issues we obviously spend a lot of time looking at this is certainly, when we were doing all that, we were thinking mid cycle in the range of 1.5 and maybe mid cycle is 1.5, but it's a ways out, so that certainly has had a pretty significant impact both on distribution and on EWP.

Chip Dillon -- Vertical Research -- Analyst

Understood. Although a silver lining could be that maybe some of these BMD opportunities are sprouting up the fill-in acquisitions because of the softer housing so far. Let me ask you this -- and I don't want to pin you down, but you all did actually a little better in Wood Products than we assumed. And I know you mentioned that some of the pricing while up from the bottom is still below fourth-quarter average as yet.

We know the first quarter is always a better volume quarter typically than the fourth. So I guess, my question is, if you were to kind of freeze pricing where it is today or maybe allow for a little bit of a seasonal follow-through, do you think you can get back to breakeven in Wood Products, at least on an EBIT basis because as we measure it, your EBIT loss was about $4 million in the fourth quarter.

Wayne Rancourt -- Executive Vice President, CFO and Treasurer

Yes. Chip, this is Wayne. I think we've got two things going for us in terms of getting to EBIT positive in wood. Obviously, with the write-offs and -- that we took at Roxboro and the assets that we're selling, Northeast Oregon and Moncure, we're going to have much lower depreciation charges going forward.

And the other piece I'm expecting is, as Dan talked about, the tone of the business going into the first quarter is better. I think builders are feeling a little bit better in the first quarter than they did going into the end of fourth quarter. And the incremental volume on both the EWP side and on the plywood side does very few things for our profit contribution in terms of covering fixed costs. So if we can get the volume component in the first quarter and moving into second quarter, I would expect our EBITDA earnings to improve and with lower DA, I would expect our EBIT earnings to be considerably better.

And then what really is going to drive the year for Wood Products is how much upside do we get in panel prices as we get into the second and third quarter. But in terms of getting to EBIT breakeven, I think that's certainly achievable at these price levels.

Chip Dillon -- Vertical Research -- Analyst

OK. And can you just tell us, Wayne, what you expect -- what would be a great place for us to model DD&A for the company in '19, given the write-offs and the asset sales?

Wayne Rancourt -- Executive Vice President, CFO and Treasurer

I still got to work through on a couple of issues that we've got, Chip. But I suspect that for the company, we're probably going to be somewhere around 80, so about 20 a quarter, roughly.

Chip Dillon -- Vertical Research -- Analyst

Understood. And last question, is -- what is the average lumber realization? It actually went up in the fourth quarter. And my guess is that has to do with the assets you kept or just -- or higher value mix. Is that fair?

Wayne Rancourt -- Executive Vice President, CFO and Treasurer

Part of it's product mix and part of it, frankly -- and we started this in the back half of '18 as I think our sales guys tried to really push the value we were getting paid for the product we were making because a lot of the stuff that we make is higher value lumber that goes into boards that end up through the home center programs. It is not commodity dimension lumber, and I think our guys were really trying to merchandise the value and given the limited footprint that we have and the type of material that we're selling and making, I think they were able to extract the higher price and get themselves separated a little bit from some of the index trading.

Operator

And our next question comes from the line of Reuben Garner from Seaport Global.

Reuben Garner -- Seaport Global Securities -- Analyst

Congrats to Nate and Mike and the others on the new roles. So maybe on the EWP side. Can you, I guess, talk prices there? So lumber is down and we've kind of entered a soft patch in housing or maybe we're exiting it, but there was a soft patch in housing. And then there's some new capacity coming online.

Is there any risk to where the current prices for the EWP space broadly?

Nate Jorgensen -- Senior Vice President of Wood Products

Reuben, it's Nate Jorgensen. Specific to the pricing moving forward, we look at -- the marketplace today is in pretty good balance relative to supply and demand. And as we move forward looking at housing starts relatively similar to 2018, we're expecting a pretty flat pricing environment as we go through the course of 2019.

Reuben Garner -- Seaport Global Securities -- Analyst

OK. And then, I guess, your veneer production -- the new capacity coming online, is there an opportunity there to outsource some of your capabilities?

Tom Corrick -- Chief Executive Officer

Reuben, quick question, are you talking about selling veneer externally or...

Reuben Garner -- Seaport Global Securities -- Analyst

Yes, sir. Yes.

Tom Corrick -- Chief Executive Officer

Well, I guess, Dan, I'd ask you to jump in on the heels of this, but the two projects that we're working on really won't have material impact in terms of our volumes until 2020.

Dan Hutchinson -- Executive Vice President of Wood Products

Yes. I think that's right. And I think we're -- we have adequate supply today and pretty good balance. But we -- I guess, there might be opportunities where we'd sell a small amount, but I don't believe it'll be material.

Reuben Garner -- Seaport Global Securities -- Analyst

OK. That's helpful. And then last one for me, the -- your freight inflation outlook and just kind of the freight environment more broadly, what kind of is your outlook for 2019? What specifically has kind of changed that you think would help your industry specifically to keep the mayhem from 2018 repeating itself?

Nick Stokes -- Executive Vice President of Building Materials Distribution

Reuben, this is Nick. I don't think we have any idea about how to control the mayhem. We're the -- we're not the controlling factor on that. We just have to deal with it.

Certainly, if you contrast the first six weeks of '19 against the first six weeks of '18, the environment's quite different. There doesn't seem to be as much pressure both on the rail side and the truck side. Having said that, I think what we have generally modeled is about a 3% to 5% transportation cost, both inbound, outbound and on the rail side. And at least for the distribution business, obviously, that becomes a component of our cost that we base the price on.

So it's a challenge, but I wouldn't suggest that you model it as a hit to the business because for the most part, we work like dogs to pass it along to the customers and have them pay for the incremental costs.

Operator

And our next question comes from the line of Steve Chercover from D.A. Davidson.

Steve Chercover -- D.A. Davidson -- Analyst

I was just wondering -- I know that you said that your volumes will probably be similar in Wood Products to last year, but can you give us your run rate capacities for plywood, LVL and lumber after these closures/sales?

Wayne Rancourt -- Executive Vice President, CFO and Treasurer

Steve, I would tell you to look in the tables in the 10-K that we filed this morning. Moncure, I think, we had in -- and I'm doing this off the top of my head, like 120 to 130 of capacity. And that's the main withdrawal on the veneer plywood side. The mills we sold in Northeast Oregon were lumber and particleboard and we closed the stud mill.

And then, obviously, we took out LVL capacity at Roxboro. But that capacity is basically available at Alexandria, Louisiana and Thorsby. So from a market standpoint, we won't lose any sales. I think in the capacity tables, we had about two million cubic feet in for the Roxboro as of the end of '17.

And then we've obviously adjusted that out for the end of '18.

Steve Chercover -- D.A. Davidson -- Analyst

Sure. I'll go to -- refer to those tables. And on the SG&A side, will these divestitures and acquisitions have any real impact in 2019 or can you give us a run rate guide?

Wayne Rancourt -- Executive Vice President, CFO and Treasurer

I wouldn't expect a huge change in the SG&A as a result of those operations getting closed. I think that's one of the things we've got to work on '19 is making sure that we're rightsizing corporate sales and marketing, etc, in light of those acquisitions. And then in cases like Northeast Oregon, we tried to move as many employees over to the buyer as appropriate to support what they were doing on the sales side. So a good portion of the SG&A that was directly related to the operations will go.

But obviously, to the extent we got the division folks or engineering folks, IT that was being partially covered by those operations, we'll need to make sure that we're paying close attention to the SG&A and get that rightsized with those businesses no longer being part of the company.

Steve Chercover -- D.A. Davidson -- Analyst

OK. And final question, and maybe it's for Tom, but whoever wants to chime in would be welcome. When we were with you in September, it seemed that you and your customers were all pretty bullish about your outlook for 2019. And yet by December, the wheels have kind of fallen off the housing market.

And I'm just wondering, is that a function of declining equity markets or interest rates or tariffs? I mean, selling season has changed dramatically between the end of Q3 and the end of Q4?

Tom Corrick -- Chief Executive Officer

Steve, this is Tom. And this becomes a bit anecdotal, but probably the best indication we've had is that as we've talked to builders, and I'll give you some confirming data from my perspective in a moment, I think that continued run-up in pricing tied to the increases we saw in mortgage rates last year just suddenly put in a number of markets, California being a really good example. It just created an affordability bind and people really stepped back from that. I had one customer describe it as they were turned by an F250 and now they need to buy a Ford F-150 and they're kind of readjusting their mind to that.

The thing I heard last week at the show from a couple of builders that, to my mind, confirmed it was basically they were saying that in terms of incentives for this year, the one that was really moving the dial in terms of transitioning traffic to sales were offering incentives that in fact, brought down the monthly payment. So I think a lot of this was driven by affordability.

Operator

[Operator instructions] Our next question comes from the line of Dan Jacome from Sidoti & Company.

Dan Jacome -- Sidoti and Company -- Analyst

Just a human curiosity question. Did you have a chance to talk to any multifam industry builders at that conference that -- i didn't have a chance to attend, so I'm just curious if you did and what the body language was on that? Last I checked, the multifam builder confidence index was not great, but definitely not horrific heading into 2019.

Nate Jorgensen -- Senior Vice President of Wood Products

Dan, it's Nate Jorgensen. Maybe just a couple of comments on the multifamily space. I think what we saw is -- I think they're looking at a relatively stable year for 2019. When you look at some of the affordability challenges they had exiting in the fourth quarter of '18 in terms of some of the commodity pricing, a lot of that has obviously stabilized.

And so I think in terms of optimism, I think it matches somewhat single-family. I think when you look at, again, affordability, the multifamily segment certainly has an important role in achieving that for the industry. So the feedback we got last week is limited because it was more single-family focused, but overall the tone for multifamily seems good as we're entering 2019.

Operator

And I see no further questions in the queue. I'd like to turn the call back to Tom Corrick for closing remarks.

Tom Corrick -- Chief Executive Officer

OK. Thank you. So obviously, a pretty challenging quarter both from a pricing perspective and obviously, the impact of the closures in sales. But I think it's -- as I look back on the year, we made many accomplishments in terms of driving toward our strategic objectives.

And based on the actions that we took during the year, I feel really good about our position going into 2019 and where we're positioned relative to what remains a fairly challenging market. And with that, I'd like to say thanks for calling in today, and have a good day.

Operator

[Operator signoff]

Duration: 48 minutes

Call Participants:

Wayne Rancourt -- Executive Vice President, CFO and Treasurer

Tom Corrick -- Chief Executive Officer

John Babcock -- Bank of America -- Analyst

Brian Maguire -- Goldman Sachs -- Analyst

Nick Stokes -- Executive Vice President of Building Materials Distribution

Dan Hutchinson -- Executive Vice President of Wood Products

Ketan Mamtora -- BMO Capital Markets -- Analyst

Chip Dillon -- Vertical Research -- Analyst

Reuben Garner -- Seaport Global Securities -- Analyst

Nate Jorgensen -- Senior Vice President of Wood Products

Steve Chercover -- D.A. Davidson -- Analyst

Dan Jacome -- Sidoti and Company -- Analyst

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