Morning. My name is Valerie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Boise Cascade's first quarter 2020 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. If you would like to ask a question during that time, simply press star and then the number 1 on your telephone keypad. Questions will be taken in the order they are received. If you would like to withdraw your question, press the pound key. 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 things are not guarantees of future performance, and the company undertakes no duty to update.
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 and 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 filing with the SEC. It is now my pleasure to introduce you, Wayne Rancourt, Executive Vice President, Chief Financial Officer, and Treasurer, Boise Cascade. Mr. Rancourt, you may begin your conference.
Thank you, Valerie. Good morning, everyone. I would like to welcome you to Boise Cascade's first quarter 2020 earnings call and business update. Joining me on today's call are Nate Jorgensen, our Chief Executive Officer, Mike Brown, Head of our Wood Products operations, and Nick Stokes, Head of our Building Materials Distribution operations. Turning to slide two, 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 and segment income to segment EBITDA. I will now turn the call over to Nate.
Thanks, Wayne. Good morning, everyone. Thank you for joining us on our earnings call today. I'm on slide number three. Our first quarter sales of $1.2 billion were up 12% from first quarter 2019. Our net income was $12.2 million, or $0.31 per share, compared to net income of $11.4 million or $0.29 per share in the year-ago quarter. Reported net income for first quarter 2020 includes $15 million of pre-tax accelerated depreciation and $1.7 million of other closure-related costs, or $0.32 per share after tax due to the permanent curtailment of our I-joist production at Roxboro, North Carolina, facility. Our operating performance in both businesses was strong, demonstrating the strength of our integrated business model. Our Wood Products manufacturing business reported segment income of $3.8 million in the first quarter, compared to $11.6 million in the year-ago quarter.
The first quarter 2020 results include the Roxboro previously mentioned charges. Our Building Materials Distribution business reported segment income of $29.3 million on quarterly sales of $1 billion for the first quarter, compared to $17.5 million of segment income on quarterly sales of $908 million in the comparative year quarter. Wayne will walk through the financial results in more detail. I'll come back to provide an update on ongoing response to COVID-19 impact on our businesses and our outlook before we take your questions. Wayne?
Thank you, Nate. I'm on slide four. Wood Products sales in the first quarter, including sales to our distribution segment, were $320 million, flat with first quarter 2019. As Nate mentioned, Wood Products reported segment income of $3.8 million in the first quarter, compared to $11.6 million in the prior-year quarter. The decrease in segment income was due primarily to accelerated depreciation of $15 million and other closure-related costs of $1.7 million at our Roxboro facility, as Nate mentioned. Reported EBITDA for the business was $33.4 million, up from the EBITDA of $25.4 million reported in the year-ago quarter. Higher EWP volumes and lower manufacturing costs contributed to the improved EBITDA performance compared with first quarter 2019. Lower plywood pricing was a drag on first quarter 2020 comparative performance. BMD sales in the quarter were $1 billion, up 16% from first quarter 2019.
Sales volumes were up 17%, while sales prices declined 1%. The business reported segment income of $29.3 million, or EBITDA of $34.6 million in the first quarter. This compares to segment income of $17.5 million and EBITDA of $22.6 million in the prior year quarter. The increase in segment income was driven primarily by a gross margin increase of $24.6 million, resulting from improved gross margins on commodity products and higher sales of general line products in EWP compared with first quarter 2019. This improvement was offset partially by a $12.2 million increase in selling and distribution expenses. The amounts for unallocated corporate costs and other items impacting our reported EBITDA can be found in the tables of our earnings release. The net of those items was - $8.4 million in first quarter 2020, compared with - $7.3 million in first quarter 2019.
Turning to slide five, our first quarter sales volumes for I-joist and LVL were up 14% and 8%, respectively, compared with first quarter 2019. Housing start activity was quite strong at the beginning of the year as favorable weather combined with good economic factors to create robust demand for new single-family residential construction. We didn't begin to see much of an impact of the COVID-19-induced slowdown in the pace of new single-family construction until the latter part of March. We adjusted our EWP mill operating schedules early in the second quarter to be in tune with the changing demand situation and to avoid building excess inventories. Pricing in first quarter for I-joist was up 1%, and LVL pricing was down 2% compared with first quarter 2019.
Turning to slide six, our first quarter plywood sales volume in Wood Products was 318 million feet, compared to 336 million ft in first quarter 2019. We were able to push a higher proportion of our veneer production into EWP in the first quarter, given the solid demand fundamentals. The lower volume for plywood sales reflects the sale of the Moncure plywood facility during first quarter 2019. The $267 average plywood net sales price in first quarter was down 7% from first quarter 2019. Plywood pricing showed nice momentum throughout most of the first quarter, but orders began to weaken in March as distribution customers significantly slowed their buying and worked down inventory levels in response to the COVID-19 pandemic. Declines in demand led to weaker prices in April. Plywood pricing thus far in the second quarter is approximately 5% below our first quarter 2020 average.
Moving to slide seven, BMD's first quarter sales were $1 billion, up 16% from first quarter 2019, with volumes up 17% and pricing down 1%. By product area, BMD's commodity sales increased 11%, general line product sales increased 23%, and EWP sales increased 14%. The gross margin percentage for BMD in the first quarter was 12.6%, up 80 basis points from the 11.8% reported in the first quarter of 2019. Gross margin increase resulted from improved gross margins on commodity products and higher sales of general line products in EWP compared to the first quarter of 2019. As a reminder, our general line products in EWP that we service through our branches tend to have higher gross margins, but also higher associated sales and handling costs. BMD's EBITDA margin was 3.3% for the quarter, up from the 2.5% reported in the year-ago quarter.
Robust construction activity in the first two months of 2020, as evidenced by seasonally adjusted housing starts of around 1.6 million, drove sharp increases in commodity products pricing that peaked in mid-March. However, concerns and uncertainty about the impacts of COVID-19 since then have negatively impacted residential construction activity and building products demand, resulting in curtailment of production across the industry and a sharp decline in commodity prices. Current composite panel lumber prices are approximately 15% below the peaks of mid-March 2020. We anticipate that commodity products pricing in the second quarter will remain at current low levels, which will be similar to the price levels experienced in second quarter 2019. Slide eight shows the rollercoaster ride of lumber pricing in the first four months of 2020.
Most of the major lumber producers have adjusted operating rates in response to the demand situation, which should help stabilize pricing once end market consumption is more predictable and the supply chain becomes more comfortable establishing inventory positions. On slide nine, one can see the same pricing pattern for the Random Lengths composite panel index. Again, there have been significant curtailments by many of the OSB and plywood producers in response to downstream supply chain behaviors. On slide 10, we have set out the key elements of our working capital. Company net working capital, excluding cash, income tax items, and accrued interest, increased $91.5 million during the first quarter, representing a seasonal use of cash. The seasonal increase in accounts receivable and inventories was not fully offset by the increase in accounts payable.
As is normally the case, we also used cash to pay out incentive compensation and customer rebate accruals during the quarter, reducing accrued liabilities. If business conditions remain meaningfully weaker for the balance of the second quarter, I would expect our working capital levels to fall by the end of June and result in additional cash generation. 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 interested. I'm now on slide 11. We finished the first quarter with $215 million of cash. Our total available liquidity at March 31 was approximately $560 million, which reflects our cash and availability under our committed bank line. We had $440 million of outstanding debt at March 31, with no maturities prior to 2024.
We were originally targeting capital spending of $85 million-$95 million this year, we have reduced the plan to between $50 million and $70 million in light of the expected lower cash flow from the businesses. The reduced spending level includes funds to complete the Log Utilization Center improvement project at our plywood and veneer facility in Florien, Louisiana, as well as BMD's door shop expansion in Dallas, Texas. We expect our effective book tax rate to be between approximately 25% and 30% going forward, with potential adjustments under the CARES Act. I will turn it back over to Nate to discuss our COVID-19 business update as well as the outlook.
Thanks, Wayne. I'm on slide number 12. Our first priority during the crisis continues to be the health and safety of our associates and those with whom we do business. It is important that we continue to support community efforts and conduct our business appropriately based upon the guidance from the CDC, among others. In anticipation of weaker business conditions over the next several quarters, we reduced our capital spending plans, adjusted manufacturing production levels, and implemented a number of actions to preserve cash and reduce expenses. We have further actions identified, which we will implement as we move deeper into the quarter if it becomes apparent that demand environment and economic outlook is unlikely to reverse in a reasonable timeframe. We have the experience of the last financial crisis to lean on in planning our COVID-19 response.
However, we believe the early actions at the federal level to respond with a fiscal and monetary stimulus is likely to mitigate the depths of the economic damage and shorten the path to recovery. We are already seeing actions to thoughtfully reopen portions of the economies in the states where the curve of infections has flattened, which provides us hope that we will see a return to normal activity in a much shorter period than following the 2009 financial crisis. I'm on slide number 13. The Blue Chip consensus for U.S. housing starts was last published at an expectation of 1.16 million for 2020. We would expect the consensus to fall between 1 million and 1.1 million housing starts over the next several weeks, but the second half of the year is very hard to predict.
The new start rate and in-progress completion rate for single-family new construction has slowed considerably as we have moved through April. Many builders have scaled back their construction of spec homes. Order cancellation rates have increased for many builders, and safe distancing practices have extended construction timeframes. All of those factors lessen near-term consumption of the products we produce and distribute. The COVID-19 pandemic and the ripple effects negatively impacted BMD's sales pace in April by approximately 13% per day as compared to March. Our sales volumes declined as residential construction activity slowed in markets constrained by shelter-in-place orders, and in other markets, as a result of builder construction pace adjustments, including heightened construction site safety measures. We also experienced revenue deflation from lower prices for commodity wood products during the month of April, relative to first quarter 2020.
We expect COVID-19 pandemic impact to result in sequentially lower sales and earnings in the second quarter in both manufacturing and distribution as states slowly reopen their economies. Because we continue to be categorized as an essential business in the vast majority of jurisdictions, we are in an excellent position to respond quickly to support our customers, should demand rebound more quickly than expected. BMD is maintaining high service levels with the on-ground in-market inventories and is helping our customers make effective use of their working capital dollars. With uncertainties in demand and difficulties in judging the appropriate operating rates, commodity wood products pricing could be volatile in the months ahead. We will react appropriately. We will continue to be guided by our values of safety, integrity, respect, and pursuit of excellence.
We will successfully get to the other side of this crisis by centering on the health and safety of our associates and making sure we use our operating and financial strength for the benefit of our customers, suppliers, communities, and shareholders. Thank you for joining us today and for your continued support and interest in Boise Cascade. We would welcome any questions at this time. Valerie, would you please open the phone lines?
Thank you. As a reminder, to ask a question, you need to press star one on your touchtone telephone. To withdraw your question, please press the pound key. Please stand by while we compile a Q&A roster. Our first question comes from Brian Maguire of Goldman Sachs. Your line is open.
Hey, good morning, guys. Good to hear your voice. Hope you're all doing well.
Thanks, Brian.
I appreciate the comments on the 2Q outlook there. It sounds like things obviously decelerated a lot there towards the end of 1Q and into April. The down 13% in BMD, I just wanted to clarify, I wouldn't say it was quarter-over-quarter or year-over-year, how you were talking about that. Have you seen any week-over-week improvement as we've gotten into early May here? Any signs of green shoots or activity resuming, or are we sort of still trying to find a bottom on some of these numbers?
Brian, this is Wayne. The 13% is the comparison of the daily sales rate in March with the daily sales rate in April. Part of that 13% is going to be price deflation, and some of it will be volume declines. I would tell you, in our case, the pace slowed at the end of March and into the first part of April. As we've seen some reopening, particularly in the states that shut down construction as non-essential, those that have changed that designation, we're seeing a pickup in sales activity. I think the general feel is that people are pretty positive with the states taking the reopening. I think part of what we're seeing in May, and the volumes in May have been pretty good, the first week.
I think part of what we're seeing is more comfort at the dealer level and trying to rebuild inventories, because I would tell you from the anecdotal stuff I see, I think there is a fear of missing out if the pace accelerates. People don't want to be caught short, and I think they're less concerned at these price levels with getting caught with inventory that would get marked down in the future. I think part of what you're seeing is an improvement in field activity, and part of what you're seeing is a little more comfort on restocking the supply chain.
That's good to hear. You hinted at some other cash actions you might be able to take if things do worsen, and hopefully you don't have to do that. Is there any more specifics you can provide on what sort of other options you've got?
Yeah. It's the same laundry list that we put together in 2009. Again, I would hope that we don't have to take these, but the ones that have been implemented already are what I would describe as somewhat easy to do, the reduced capital spending.
Try not to fill open positions, salary freeze, et cetera. The other suspects that would be on the list if this got a lot worse and if we found ourselves in something that looked like 2009 and 2010, obviously we can reduce compensation at the senior management level. That already happens automatically because there's a considerable amount of our pay that's variable. We could look at base pay reductions in director fees, salary cuts more broadly. We would probably eliminate more positions. One of the things I think you'll see us do in the short term is try to protect salary positions, particularly in talent areas or geographic locations where it's really hard to refill positions. We're likely to try to protect those salary positions over the next several months while we see how this plays out. Obviously that would be on the table.
Speaking personally, I would probably try to maintain the base dividend, but I would be very surprised to see us pay any supplemental dividends or do share repurchases in that kind of a downside environment. I don't know that we would necessarily be active on the debt retirement side, but we would certainly try to maintain as much liquidity on the balance sheet as possible.
Brian, it's Nate. Sorry, Brian, just maybe to add to that, as Wayne described, we have a number of different scenarios that we're looking at in terms of what it could potentially be in terms of business condition and the business environment as we move forward. I think we've got kind of the right optics and the right metrics in front of us in terms of what would that need to look like. As Wayne described, use some of the same cost reduction actions that we've done prior, should we get to that spot. I think as we kind of finished off April and heading into May, it's encouraging to see business levels certainly stabilize and slowly respond. We feel good about our cost position as we sit today, but we're prepared to do something different if required.
Okay, last one from me for Wayne. Just a question on receivables and if your customers are asking for extended payment terms and just sort of just the overall level of potential for bad debt expense to start creeping up if we start to see either collections take a backseat to other issues that some customers might be having in this environment.
Yeah, as a general rule, we're very conservative on credit, and through the last downturn, we had minimal write-offs, and I would expect the same to be true now because we've got the same credit team in place. We have had a number of customers that have reached out and asked about extensions, and I think Nick and his team, the general response has been, "We will keep our promise to you in terms of having the inventory to back you up, full trucks, and ready to service you." Our expectation is that you will continue your promise to us, which is to pay us on time and within terms. So far, I think that has been received reasonably well. I would tell you, we started to see modest shifts in April, and I would expect this to accelerate if we continue to see the slowdown.
We did see more activity out of warehouse and less customer direct shipments from manufacturers. I think particularly on the commodity products, a lot of the mills have 10-day terms, and in a lot of cases, we allow for 30-day terms. I would expect us, if the activity level slows down through the channel, I would expect more of the dealers to start relying on two-step instead of taking shipments direct. We've got a number of our wholesale competitors that are very stressed from a balance sheet standpoint, and on some of their public comments, they're clearly ratcheting back personnel and inventories. We saw in 2009 and 2010 that by staying in stock and in essence, having on the ground inventories and being able to short timeframe respond, that we picked up business activity.
I think that those two factors will probably help cushion some of the fall off. As I mentioned, we're going to do that and support the customers that we're highly confident are going to be around and can help make sure that we don't end up with significant bad debt losses. We are not going to chase business where people are being denied credit at other wholesalers or where we don't think they're likely to make it through this if it turns out to get ugly.
Yep, that sounds great. All right. Take care, guys. Hope you're doing well.
Thank you.
Thanks, Brian.
Thank you. Our next question comes from Mark Wilde of BMO Capital Markets. Your line is open.
Thanks. I'd like to just loop back and give a little more color, if it's possible, on just where you see kind of inventory in the channel. It sounded like you were suggesting that there had maybe been some inventory rebuilding in the channel in the last week or two.
Yeah. Nick, do you want to touch on what you guys are seeing real-time?
Thanks, Wayne. Good morning, Mark. As we've talked about, there's no metrics, but I would tell you I have some pretty strong impressions this time, just given conversations with customers and suppliers and quite frankly, our own order intake. As Wayne articulates, we've seen a pretty big shift from people willing to take pretty significant positions in particularly commodity inventories, but really inventories of products across the system. I think that's a function in what our customers are saying. It's a function that A, they don't have a big appetite for market risk. B, they're just very focused on their own working capital situation. I would tell you probably more so than any time that over the last many years, inventory levels across the system, I think, are relatively low.
Again, I think you've seen a bit of price appreciation on the commodity side in the last three weeks, in a couple of cases, kind of dramatic price increases over the last few weeks. I think that's a function of demand starting to creep up a little bit as this thing opens up and a relatively lower level of supply and a reflection that inventories are low. I think customers and everybody in the channel will continue to play it that way, which really plays into our hands in terms of the out-of-warehouse business. That's the best I got there, Mark.
Yeah, that's actually really helpful because I was noticing when Random Lengths came out last night, I mean, some of these increases that we've seen over the last three, four, five weeks are really quite dramatic in percentage terms, Nick.
Yeah, absolutely. When we get that kind of price escalation, obviously, it provides a little tailwind for us on both the margin side and the sales side. We're happy to see a little of that here and there.
Could you maybe give us a little bit of color on just how you manage so that when we get a big drop the way we saw in March, that you guys don't end up taking a big inventory hit on that?
I'll give you the secret sauce here. There's not a lot of voodooism, for lack of a better way to say it. What we try to do, Mark, this is a plan that we've had for years and years and years, is we try to buy based on what we're going to sell in the short term. When we get a little market movement, we may fudge that a little bit, knowing that we're going to sell more when the prices are escalating than when they're deescalating. We've never had the strategy, nor will we, to go out and take big risks on the commodity inventory. Our commitment to our suppliers and our customers is to buy every day, be in the market every day, and keep the flow steady.
Certainly, when you get some pretty dramatic swings on those prices, as we saw kind of in the month of March for part of the time in the month of March and April, and certainly in 2018, we did, in fact, have reserves and some more cost to market adjustments. It's just a function of the strategy that says that we should be consistent all the time, buying and selling. That's where we create value for both the supplier side and the customer side. The guys and gals that do that every day are making good decisions because they're really talking to the customers in the local markets. Those are decisions that are made at the location level in terms of the quantities.
Obviously, we try to leverage our size and scale and scope when and where we can, but it's a focus on the customer and knowing what the customer's going to have for us in terms of order flow.
Okay. Last one for me. I just wondered, Nate, if you could talk a little bit from a kind of a capital allocation standpoint. I see that you're moving ahead with that Dallas door shop, and I know that kind of broadening the range of product out of some of your DCs has been kind of a priority for you guys. I'd also like you to talk about that and what the opportunities might be in kind of from an M&A standpoint over the next 12-18 months, whether you can kind of take advantage of the people in the market.
Yeah, Mark, I think as we look at our strategy overall, and specifically, in regards to BMD, we've been pretty consistent about our desire to continue to grow that footprint, both from a product perspective, from a geography perspective, as well as the categories, including millwork and doors, as you mentioned. I think as we kind of pressed up against kind of COVID-19, we're, I think, even more encouraged around our strategy and our ability to continue to grow the marketplace. As Nick described, I think we have very strong support from our customers and suppliers in terms of growing our position, and that will continue to be a really important part of our path forward here, short-term and long-term.
In terms of the confidence and optimism we have around our distribution business, I think, again, as Nick and I think Wayne described as well, our customers are going to be very dependent upon us in terms of warehouse support, and we're prepared for that, and we're looking forward to that as well. As we move forward, we want to continue to grow that business. As you described over the next 12-18 months, we suspect there's going to be perhaps some meaningful opportunities, different opportunities that'll emerge as maybe compared to even three to six months ago. I think we're well-prepared as an organization financially. I think we want to be measured, Mark, just given all the uncertainties that are in front of us, including when you look at the unemployment number from this morning, it's stunning in terms of nearly 15% unemployment.
We'll be measured as we move forward, but I think in terms of our conviction and belief around growing our distribution platform, and continuing to invest in that platform for a range of products and services, including expansions where appropriate, that's certainly part of our path forward.
Okay, sounds good. I'll turn it over.
Thanks, Mark.
Thank you. Our next question comes from Reuben Garner of The Benchmark Company. Your line is open.
Hey, Reuben. Good morning.
Good morning, guys. Thanks for taking my questions. Maybe, let's see. Maybe starting on the general line business. Very strong growth again in the quarter. I think you've had a string here of three or four quarters in a row with pretty impressive growth. I assume a little bit of that is still M&A, but the vast majority of it is volume growth and probably share gains. Can you just give us an update there? Can that continue going forward and help you maybe offset some of the market declines, just because it's a self kind of initiative?
Yeah, Reuben, this is Wayne. I'll let Nick follow on if I mess this up. I think part of what you're seeing on the general line is we've got a couple key products that are very important in that section. composite decking and siding being two that I would probably point to, and we continue to have very good results there. As you may recall, in the middle part of last year, we picked up a relationship with a key supplier in the siding arena, and we've had very good growth in a number of our branches in that product category. Part of what you're seeing is a comparison in 1Q 2020 that has those sales in that category growth compared to those sales not necessarily being in the base year.
I think some of the quarter-over-quarter growth numbers will slow down as we get into the back half of 2020. Certainly, that supplier relationship and that win in the siding category, and again, very good performance continuing on the composite decking arena. Those are two that I'd point to. Nick, I don't know if you would add beyond that or correct what I said, but I would say that's two of the areas that I pay attention to.
No. Good morning. This is Nick again. I think you hit it on, and I think, Reuben, you touched on the third leg of that. If you think about the acquisitions we've made, in the first quarter of 2019, we didn't have our Birmingham operation and those numbers, and obviously we do this year. I think the sum of all those three things is how you should think about it.
Thanks. That's very helpful, and it kind of ties into my next question a little bit. As we've seen some R&R strength, particularly in the DIY channel. I guess, are you guys seeing benefits of that in your plywood business at all in the early part of Q2? I know you took quite a bit of volume or capacity out in that space. How quickly can you bring it back on if maybe demand's not as bad as you initially anticipated?
Mike, you want to take that one?
Sure. Morning, Reuben. This is Mike. You're right. If you look at the big boxes, they're quite stunning, really, the consistency and recently improvement in demand for panel products. I can't explain exactly why all that's happening other than perhaps people that are sheltering at home have many DIY type projects that they're undertaking. It's been very helpful for us in terms of maintaining the sales levels for our plywood products. I hope it continues. May even increase as we get into the summer. The question around can we produce more if necessary? We stated earlier, some weeks ago, that we were reducing our volumes, of course, which we have done, basically in line with what we put out. We have the ability in a relatively short period of time to ramp up volume if required.
That would be either through the folks that are still working with us today. There's overtime opportunity. In certain locations, we have a callback list where we can go to those folks that were unfortunately laid off and call them back to work. Usually that can be done within, I'll say, a week or so if necessary. I don't see a huge problem if required in terms of ramping up the volumes to meet the demand at this stage.
Okay. Very helpful. Good luck navigating through this, and stay safe, everybody. Thank you.
Thanks, Reuben.
Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star then one on your touch-tone telephone. Our next question comes from George Staphos of Bank of America. Your line is open.
Hi, everyone. Good morning. Thanks for the details. Hope you're all doing well. Thanks for all you're doing on COVID as well. Hey, the first question that I had, I wanted to go back to the extent that you can comment on a question that I think Brian had teed up. Is there a way to quantify what that potential shock absorber, hopefully you never need to get to it in this cycle, but what it might be able to look like, what it might be able to buffer your results or cash flow by if in fact we had to go to that next step? It sounded like given trends coming out of April into May, that looks to be less likely, but I just wanted to confirm that.
Yeah. We will see where we are on the run rates, particularly in distribution as we go through May. I think as a general rule, Mike can jump in here, we're running our Wood Products facilities basically five days a week, 24 hours a day as opposed to 24/7. We'll obviously pay attention to operating rates and prices on what's going on in Wood Products. The key, I think, over the next several months is going to be what activity levels do we see through distribution. I would describe it to you this way in terms of the cost reductions. We are not concerned at all about balance sheet and liquidity and cash. In terms of getting through this downturn, we don't foresee any issues from an affordability standpoint. What we're very focused on is trying to also pay attention to earnings level.
We will make cuts when appropriate if we think we are taking too much of an earnings decline, because obviously we're paying attention to our ratios of debt to EBITDA. We want to make sure we continue to cash fund our CapEx interest and dividends. Again, we have a list, and I'll give you an example. Again, I'm not saying we will do this immediately, but if we were to suspend 401 match, for example, that annualizes out to about $12 million. Now, would I prefer that we don't need to go to our employees and ask them to, in essence, give up $12 million worth of retirement benefits? I would prefer not to do that. If this looked like 2009, in 2009, we eliminated our pension and we suspended 401 contributions.
Again, that type of playbook could be relevant if we got into a draconian situation. The same would be Nate and I taking cuts in our base pay, along with what we're seeing for reductions in variable comp. That's a couple million dollars in corporate expense. If you do that across the corporate team, we could take several million dollars out of our corporate overhead. Would I prefer not to do that? Yes. I don't think we're going to need to do that to preserve liquidity or cash from an affordability standpoint. We are very conscious that we don't want our debt to EBITDA ratios to go out of line, and we do not want to be borrowing to pay interest or pay dividends. We would like to maintain as much earning strength as appropriate.
Again, if need be, we will be at the lower end of that capital spending range. If we see things improving, we will probably be closer to the $70 number, because as Nate mentioned, there's a couple things that are on the docket that we would like to do to continue to expand the distribution footprint. If you said scale the expense reductions, it could be anywhere from 0 to $20 million-$25 million on an annualized basis, depending on how bad the situation becomes. We've got a list that would build to a meaningful number if we got into that scenario.
Wayne, that's great. I purposely said it in an aggregate way. I didn't mean initially for it to get granular. I appreciate that candor, and you guys have done a great job of positioning the balance sheet for things like we're experiencing right now. It's unfortunate, but it's great that you've done that.
Again, no insult taken. We're just trying to be very thoughtful of preserving the franchise, preserving employee morale, and frankly, for our suppliers and customers, sending a very strong message that if you're concerned about having a distribution partner that can get your products to market and pay you, if your product aligns with what we're trying to do, we are open for business and prepared to support our suppliers and help them continue to grow and take share.
George, it's Nate. Maybe just to add on that, I think we see this as a momentum opportunity. Obviously, a very difficult climate, we think we are well-positioned as a company to meet this challenge and including, I think, the experience and depth of our team in combination with our balance sheet. As we think about the challenges, it's an opportunity to gain share, gain momentum, and really accelerate coming out of this whenever that takes place. That's part of our thinking in terms of making sure we've got kind of the correct spending levels that are in place today. If things turn south, then we're prepared to move forward.
We think things have stabilized and slightly improved, and we want to make sure we're in a position to provide great service and support, as Wayne described, both to our customers and suppliers, and that's certainly part of our thinking as well.
No. Understood, Nate. Understood. Again, thank you for the directional guidance on 2Q. That's helpful given for any of the Wood Products businesses, how much earnings can swing with pricing and demand. What have you baked into your outlook, if not just 2Q, but into the year from potential increases in imports from South America? I know in the last few quarters when it's been brought up, it hasn't been a factor. Canfor on its call today was talking about exporting a bit more. Copec, Arauco's been talking about that, although they haven't reported their numbers yet. Are you seeing any change in the dynamic there, or is it pretty humdrum at the present time? Relatedly, on the supply side, it seems like some of your peers in EWP are having a little bit of difficulty running.
Are you seeing that as an opportunity to either gain share and/or at some point take pricing up in EWP, even though prices were flat to down this quarter?
Mike, do you want to touch on that?
Yeah, sure. Yeah. Good morning, George.
Hey, Mike.
Yeah, man. The South American issue, I guess I would say it's pretty much business as usual. We haven't seen either a great fall off or a great increase. I know you're tracking things like what's happening to the Brazilian real, which is at all-time record highs. With the fact that our plywood pricing in the States has appreciated a little bit over the recent past. If they could produce more, I think they would try and ship more. As you are well aware, they're having some very significant social issues with related to COVID-19 in Brazil at the moment. If they can get it produced and get it on a boat, I think they will try and send some more, but I don't think that's going to be from today to tomorrow. It might happen over the next quarter or two.
You asked a question about EWP pricing. I think that would be a very-
Competitor supply
Yeah, both.
Yeah.
Yeah. I'll do the pricing one first. It's a tough market to raise pricing, I get it, but just want to see. I think it would be a challenge at this point in time, given the situation as it relates to home builders and some of the additional costs that they're incurring as well as our dealer partners to go out and force a price increase at the moment, which is sort of related to your other comment and question around EWP supply from our competitors. I can't speak to all the challenges that they're facing, but as it relates to our situation, we have ample amount of veneer, so we're not really impacted by having to buy veneer on the outside market because we're not quite at mostly 100% self-sufficient.
We have ample production capacity, and we have ample finished goods inventory to service our current customers. There may be some opportunity if one of our competitors sort of falls on their sword, but I haven't heard a lot of that of recent time, to be honest.
Okay.
I think it's fair to say that the new capacity that was coming has not had a meaningful impact in the marketplace that we have seen to date. It's fortunate that that facility has been slow ramping up, because given the declines in demand, this would've been a bad time to have a lot of incremental supply show up in the market. At least at this point, we haven't seen much of any impact in the market from that capacity.
George, the other thing.
Go ahead, sorry.
Yeah. Sorry, George. Nate. I'd just maybe add one other thing, just in terms of when you're in these kind of moments where for a producer, whether it's EWP or other products, great distribution really matters at this point in time, given the.
Sure
Probably the more dependence out of the warehouse. As I think about our EWP franchise and the integrated model that we have, obviously with BMD and Wood Products, along with some of the independent distributors we have, I think we're in a really strong position to service and execute in the marketplace, maybe better and different than maybe some of the other EWP manufacturers that are out there. To your point on share and our ability to service and support the market, we feel really good about our distribution capabilities, certainly it started with BMD.
Okay. You know what? I'll turn it over. I had one more question, but just to be fair, I'll turn it over. Thanks.
Thanks, George.
Our next question comes from Steve Chercover of D.A. Davidson. Your line is open.
Good morning, everyone. A couple of my questions have been asked, but let me just try to get a couple in here. Amazingly, both the lumber composite and the panel composite appear poised to exceed the Q2 2019 average prices and according to the charts and most recent Random Lengths. Presumably, the real hit for you guys is on volumes and cost absorption. Can you just help us understand how the diminished volumes might impact your decremental margins?
Sure. Again, Mike or Nick can chime in. I think part of the challenge in 2Q is going to be potentially price in combination with volume. To your point, if we end up flat on 2019 prices, I think the biggest decremental hit in Wood Products will be running five days a week instead of seven. As I said, we have been reluctant to take a lot of salary cost out, with the view that with the states reopening, we really want to see if we're going to go back to a full operating schedule later in the year. That remains to be seen. I think typically, I would've said that the decremental margins in Wood Products on an EBITDA basis would be in the 20%-25% range. I suspect in the short term here, it will be more than that.
We would get back to a number that's closer to that if we start, instead of running facilities five out of seven days, if we came to a conclusion that this was gonna go on for an extended period of time, we might identify one or more higher cost facilities and take them dark and pull out more fixed costs. I think on the distribution side, it's a somewhat similar story. On the way up, we typically talk about a 4%, 4.5% incremental EBITDA margin on revenues.
I suspect the decremental margins will be slightly worse than that as we lose volume. If you look at some of the things that Nick and his team have put in place as we've been growing the business pre-COVID, and I think about what our cost structure looked like, pick a number, the last time we were at $3 billion in revenues, we had fewer geographic locations, fewer branch managers, et cetera. If we were to see a 25%-30% drop-off in revenues in BMD, we would need to make structural changes in the fixed cost to get back to where we were from a fixed cost basis at $3 billion of revenues on the way up.
In terms of guiding on the way down, at least in the near term, I would think of a number north of 4.5% in terms of the decremental margins in BMD. I think it will somewhat be hard to look at an incremental drop, for example, of $100 million in revenues, because likely the commodity pricing variation and the margin impact on the remaining sales, if you said you went from $1.1 billion down to $1 billion in revenues, I'm not sure looking at the decremental margins on the $100 million is going to be that indicative versus do we lose 40 basis points on margins on the whole book? I fully expect margin compression in the second quarter in BMD if we lose volumes in April and May and into June.
Again, in Wood Products, I think you'll see a pretty steep drop-off in EBITDA if we're running down 25% or 30% on volumes. That will have a meaningful impact on the EBITDA generation in Wood Products in the near term.
Thank you. This might sound like a goofy follow-on, but what are the logistics of going from seven days to five days? I mean, do you have shifts that go seven days on and two days off, or how does that work?
Mike,
Yes, please. I'm back on. I got cut off, but I'm back. The simple way of explaining it is, generally, I'll use the plywood mill as an example, Steve. We run a four-shift operation, which means that there are eight hours in a shift. Each shift, there are three shifts in a day, and we have one additional shift that sort of substitutes on a rolling basis. When we go from seven days a week to five days a week, we simply reorganize those deck chairs and clearly, you end up needing less people, but you effectively reduce the number of people you have, but you still end up with a rolling configuration in most cases, not all. In some locations where we have a union representing our employees, there's a sort of a hierarchy or a bumping list, as it's called.
Essentially it works on tenure. Those that came on last are the first to go off, unless somebody that's more senior or tenured wishes to opt out. It does take a little bit of time, but, as we indicated weeks and weeks ago now, we've effectively maneuvered all our facilities from that seven-day operation to five. Not all our mills run 24/7, because in this market situation, not thinking of the EWP side, we have capacity that we haven't been using recently because we obviously haven't got anywhere near the 1.4 or 1.5 million housing starts. Is that enough detail for you?
Yeah, thanks. Yeah, no, that's helpful. Then finally, when it comes to your operating posture, are we at a point now where cash generation or contribution takes precedence over generating an appropriate return on capital?
Well, again, this gets back to the preserving the balance sheet versus preserving the P&L and preserving the forward franchise. At this point, we remain very return on capital-focused, but I would tell you, we maintain return on capital focus over three to five years, not 90 days. Part of what you're going to see in terms of maintaining the franchise and investing for growth, including, by the way, payroll cost, inventory, holding positions, et cetera, we think over three to five years, our shareholders will get paid if we can continue to grow this franchise and take share. That may mean suboptimizing the P&L if you're measuring on a 90 or 120-day period. If you said, am I return on capital-focused? Absolutely. Are we focused from a capital allocation on trying to generate compounded returns for shareholders? You bet.
We're doing that with a view over three to five years, not let's make sure we report a $2 million or $3 million better number in the second quarter than we otherwise would. We're very much trying to figure out that balance point that says, how do we take advantage of our financial position, service in the market, et cetera. While it may involve some incremental near-term costs, we think, as strange as it sounds, we have an opportunity to step on the accelerator and create rewards for our shareholders that will show up three years from now, five years from now. We could be more draconian and show better results for 2020.
We don't think we would get as much leverage and gain into 2021, 2022, and 2023, as if we stay focused, everybody head down working and really focused on customers and suppliers and frankly, taking care of our people. We think the commitment to our people and commitment to customers and suppliers will pay our shareholders, from a return standpoint, no pun intended, great dividends in the next three to five years if we do this right over the next six to nine months.
Got it. Not like I'm a golfer, but there's a short game and a long game. Well, thanks, guys. Stay safe.
Thank you.
Thank you.
Thank you. Our next question comes from John Babcock of Bank of America. Your line is open.
Hi, guys. I just want to relay a question actually from George here. Overall, our experience in the past with door business has been that it is challenging for door producers. Some of this is driven by overcapacity. Why is this a good business for Boise to build out in BMD? Generally, is it that the supply side gives you attractive procurement of doors or is it something else?
On the BMD franchise, like the door shop in Texas, we have a very good relationship with Therma-Tru and a number of other branches. This is really extending the franchise we have with Therma-Tru in the Atlanta geography. We're taking that same business model and taking it to Texas. Again, it's a very good relationship with Therma-Tru. We have the capital available. We think the Texas marketplace is likely to be a great opportunity for us over the next three to five years. By the way, we think relative competitive dynamics, we will have a very good offering in market this year, and we'll be able to capture share this year and into 2021, that if we delay, that market share capture may be more difficult to achieve if we were to delay this till 2022. We think this actually creates an environment for us.
That's true in a handful of geographies where we think we've got fill-in opportunities. We think we have an opportunity to take advantage of this fact that we can afford to keep inventories on the ground and keep people in place and high service levels. We think we can continue to fill out BMD's map. Again, there is going to be a shared trade-off if you said, does the market really need the incremental capacity? Maybe not, but we think we're playing from a position of strength. Again, we don't think we're going to have a negative impact on margins necessarily from doing that because we think our balance sheet is going to give us a real advantage with suppliers and customers.
Okay.
John, this is Nick. One point of clarification here, and maybe I'm mishearing you a bit. We are not going to manufacture door components. We're not going to manufacture slabs or frames or anything like that. What we do in our existing facilities and what we intend to do in Dallas is take those components and assemble, like manufacture, but more assemble finished door units. To Wayne's point, it's an augmentation of our product mix that our current customers are buying. In the Dallas situation, we anticipate taking share, and it really adds to the product mix and the service capabilities in terms of the things that we can do from a scale standpoint to service our customers. Just for clarity, we're not manufacturing door components. We are assembling components into pre-hung units that we take to the lumberyards.
Okay. Thanks for the detail.
Thanks, Nick.
Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Nate Jorgensen for any closing remarks.
Great. Thank you, Valerie. Before we wrap up, I want to express my appreciation to our associates for their continuing efforts to work safely, to take care of each other and their communities, and to service our customers. The rapid negative impacts of the pandemic situation have required responsive, thoughtful actions and a focus on personal and community safety like we've never seen before. Our associates have absolutely risen to the occasion. I'm tremendously appreciative and proud of all that they are doing. I'd also like to recognize the incredible efforts of the medical professionals, first responders, and others working tirelessly to get us safely to the other side of this outbreak. There are untold number of people showing up every day and putting others first, including those helping on food security and housing issues driven by the crisis. This is a time that calls for unity and compassion.
There are signs that the economies in many states are slowly beginning to recover as COVID-19 shelter-in-place orders are relaxed. It is going to take time and will need to be done thoughtfully. In the weeks and months ahead, stay safe, be well, and help others when you have the chance. We will get through this together. Have a good weekend, everyone, and thank you.
Thank you. Ladies and gentlemen, this does conclude today's conference. You may all disconnect. Have a great day.