Q2 2020 Boise Cascade Co Earnings Call
Your conference facilitator today at this time I would like to welcome everyone to Boise Cascade's second quarter 2020 conference call.
All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period.
If he would like to ask the question during this time.
Please press star and the number one on your telephone keypad questions will be taken in the order that they are received if he would like to withdraw your question. Please press the pound.
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 risk.
And uncertainties actual results may differ materially from those expressed or implied in this call for discussion of the factors that may cause actual results to differ from the result anticipated. Please refer to Boise Cascade's recent filings with the S. Easy. It is now my pleasure to introduce you to Wane Bancorp Inc.
Second is vice President CFO, and Treasurer, Boise Cascade. Mr. Bancorp you may begin.
Thank you suddenly good morning, everyone I'd like to welcome you to Boise Cascade second quarter 2020 earnings call. It doesn't take joining me on todays call or make jorgensen, our CEO, Mike Brown, I don't know what products operations and Nick Stokes kind of our building materials distribution operations.
Turning to slide two I would point out the information regarding forward looking statements. The appendix. Other presentation includes reconciliations from our GAAP net income to EBITDA and adjusted EBITDA.
Segment income segment, so I'll now turn the call over Tonight.
Thanks Wayne Good morning, everyone. Thank you for joining us for earnings call today I'm on slide number three.
Our second quarter sales of 1.2 billion were up 1% from second quarter 2019, our net income was 33.6 million or 85 cents per share compared to net income of 27.7 million or 71 cents per share in the euro corridor.
Total U.S. housing starts decreased 17% compared to the same period last year single family starts the primary driver of our sales volumes also decreased 13%.
Despite the decline in new residential construction activity, our operating and financial performance at both businesses with strong and its unprecedent environment.
I would products manufacturing business reported segment income up 17.1 million into second quarter compared to 18.9 million in the year ago quarter.
Good products continued focus on manufacturing cost improvements was especially notable given me a production schedule modifications and temporary curtailment actions taken in the second quarter.
Our building materials distribution business reported segment income of 43.2 million on sales of 1.1 billion for the second quarter compared to 33.8 million of segment income myself, a 1.1 billion filling in the park I've heard a part of your quarter.
BMD sales an income were robust in our long term strategy and commitment to consistently carry a broad based in stock products supported by high service levels and solid financial position continues to deliver value to our vendor and customer partners and the supply chain as well as our shareholders.
I will walk through the financial results in more detail and then I'll come back to provide an update on our ongoing response to the carbon 19 impact in our businesses and our outlook before we take your questions Mike.
Thank you Nick I'm on slide four what products sales in the quarter, including sales to our distribution segment were 282 million compared to 334 billion in second quarter 2019.
As Nate mentioned wood products reported segment income of 17.1 million in the second quarter compared to 18.9 million in the prior year quarter.
Reported EBITDA for the business was 31 million down from either talk 33 million reported in the year ago quarter. The decrease in EBITDA was due primarily to lower sales volumes and prices of VW, Pete as well as lower lumber sales prices decreases were offset partially by increases in sales prices for plywood and lower.
It would cost.
The M.D. sales in the quarter were 1.1 billion up 3% since second quarter 2019.
Sales prices increased 4% mall sales volumes were down 1%.
The business reported segment income of 43.2 million work EBITDA of 48.8 million in the second quarter.
This compares to segment income of 33.8 million and EBITDA of 38.8 million in the prior year quarter.
Increase in segment income was driven primarily by a gross margin increased $16.3 million, resulting from improved gross margins on commodity products compared with second quarter 2019.
This improvement was offset partially by a 5 billion increase and 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.
None of those items was negative 8 million in second quarter 2020, compared with 7.3 million in second quarter 2019.
Turning to slide five our second quarter sales volumes for our choice and LTL were down, 18% and 16%, respectively compared with second quarter 2019.
We adjusted our either the female operating schedules early in the second quarter in response to the initial cold and pandemic impact on new residential construction in certain geographies.
We have been increasing our production schedules as come and re accelerated through the second quarter.
We are seeing stronger E.W.P. demand continued into the third quarter.
Pricing in second quarter for LDR, Nigel I slipped both down 1% compared to first quarter 2020.
Turning to slide six our second quarter plywood sales volume and wood products.
Was 314 million see compared to 343 million feet and second quarter 2019.
Lower volume from plywood sales reflects modified production levels in response to expected weaker market conditions or land second quarter.
The 287 dollar average plywood net sales price in second quarter was up 6% from second quarter 2019.
Light with demand and pricing in the second quarter was stronger than we expected at the time of her last earnings call.
Pricing in the man for plywood has remained strong early in third quarter.
We expect plywood prices to moderate as capacity restoration takes effect and mitigates the current supply demand imbalances in the marketplace and seasonal impacts on that take place later this year.
Pandemic circumstances are limiting the ability of the industry irrs quickly respond with additional production.
I wouldn't pricing thus far in third quarter is approximately 30% above our second quarter average.
Moving to slide seven BMT second quarter sales were 1.1 billion up 3% from second quarter 2019, with prices up 4% and volumes down 1%.
My product area, the empties commodity sales increased 9%.
General line product sales increased 4% and E.W.P. sales decreased 10%.
The gross margin percentage for DMD and second quarter was 13.4%.
100 basis points, when the 12.4% reported in second quarter 2019.
Gross margin increase resulted from improved gross margins on commodity products compared to second quarter 2019.
As well as an increase proportion of the sales occurring.
I don't warehouse rather than direct.
The M.D. EBITDA margin was 4.3% for the quarter up from the 3.5% reported a year ago quarter.
As cold at 19 restrictions were loosen construction activity resumed and second quarter and continued at a robust pace through the ended the quarter.
BMT warehouse sales were particularly strong as our retail lumberyard customers are relying on our broad base of inventory and high service levels to minimize their working capital investment given kobin 19 related and uncertainties and elevated commodity product prices.
In addition, we have had strong demands from our home center customers in response to elevated repair remodel and do it yourself activity as people are spending more time homes during the pandemic.
The combination of Reaccelerating construction activity and capacity curtailments of commodity products across the industry created supply and demand imbalances in the marketplace. During the latter part of the second quarter.
Commodity wood products pricing continued demand sharply higher in July.
Commodity product pricing may be volatile as we move through the third quarter and head into the under fall.
Pricing movements from current levels will likely be determined by the strength of end market consumption and industry operating rates.
Current composite panel and lumber prices are more than 50% above second quarter 2020 averages.
Turning to slide eight you can see the sharp rise on lumber pricing in second quarter, which has extended into the first part of the third quarter. Most of the major lumber producers made efforts to restore production in the back half of the second quarter in response to improve demand and the pricing situation.
On slide nine you can see this same pricing pattern for the random lengths composite panel index, which has caused many manufacturers to work towards restoring their production to New York pretty cold at levels.
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.
Decreased $89.7 million during the second quarter.
Both businesses reduced inventories during the quarter.
Distribution inventories decreased due to stronger than expected demand and higher inventory turns while manufacturing it inventories decreased due to reduction reduced production levels in anticipation of lower market demand.
Accounts payable increased from first quarter due to seasonally higher purchasing activities for general line products.
The statistical information filed as exhibit 99.2.
Our 8-K has the receivables inventory and accounts payable data broken down by segment for those that are interested in more detail.
I'm now on slide 11.
We finished second quarter with $361 million and cash on balance sheet.
Total available liquidity at June Thirtyth was approximately 707 million, which reflects our cash and availability under our committed bank line.
We had $440 million.
Outstanding debt at June 30, 2020.
On July 27, we issued 400 million tenure notes with us for inseminate interest rate.
Proceeds from the offering.
We will be used to retire our 350 million of.
Five in five eight snow Dude 2024 as well as.
45 million secured term loan.
Both of those events took place last week.
We expect to recognize a pre tax loss on extinguishment of debt of approximately 14 million during third quarter 2020.
Jordi of which represents the call premium on the existing seidman Fivex notes.
In addition, we announced.
To plan participants in our pension that we will freeze accrual of all benefits on are qualified benefit pension plan effective August 30, Onest 2020.
As well as our intention to terminate the pension plan as part of the plan termination process, we expect to repurchase two BMT locations lease from their pension plan for approximately $12 million and we do not expect the plan termination to result in a meaningful amount of additional cash contributions to the pension plan.
We intend to enter into an agreement with an insurance company to transfer all of our remaining pension assets and liabilities as soon as practical.
In response to the uncertainty of the impacts until 19, we previously announced a reduced capital spending range and 50 million to 70 million our strong financial results in cash position will likely result in us being toward the upper end of that $50 million to $70 million range.
Specter effective book tax rate to be between approximately 25% and 30% going forward.
I'll now turn the call back over to Nate to discuss our code and 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 whom we do business.
It is important we support our community efforts and conduct our business appropriately based upon the guidance from the CDC and others.
Wood products isn't the process of attempting to restore production rates. The pre cobot 19 levels in response to strong and product demand. However, we continue to experience periodic short term disruptions at many locations due to cover 19.
In addition, we expect activity levels across our distribution network to continue to vary widely as coping 18 impacts geographies across the us to different degrees and federal state or local risk restrictions are implemented or rescinded.
Today, we have not experienced significant supply chain disruptions that would limit our ability to meet customer delivery commitments or source the necessary raw materials and finished goods needed by our operations.
We continue to conduct business with modifications to mill and distribution center housekeeping and cleanliness protocols employee travel employ work locations and virtualization or cancellation of certain sales and marketing events among other modifications.
In addition, we continue to actively monitor evolving developments. It may take actions that alter our business operations as may be required by federal state or local authorities or that we determined are the best interest of our associates customers suppliers communities and stockholders.
I'm on slide number 13.
The Blue chip consensus for US housing starts was published last published at an expectation of 1.19 million for 2020.
Although we believe the current U.S. demographic support a higher level of housing starts the impact of covered 19 on residential construction are uncertain.
Beyond economic uncertainties, the pandemic may improve the demand for single family residential construction as homeowners consider a transition to less less densely populated geographies.
Furthermore, with homeowners spending more time at home repair and remodel spending may continue to strengthen as homeowners invest in existing homes.
We are seeing favorable cost improvements inefficiencies and or manufacturing operations wood products will continue to manage production levels appropriately in this volatile coping 19 environment.
And our distribution arena BMD is on a terrific job executing responding to market opportunities at both the local and national level.
Effectively manage the impacts of commodity price changes will remain at the forefront for our distribution group in the second half of this year.
With uncertainties in demand it difficulties and judging the appropriate operating rates commodity wood products pricing could be volatile in the months ahead, we'll react appropriately.
We will continue to be guided by our values of safety integrity respect in pursuit of excellence, we will successfully get 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 your continued support and interest we would welcome any questions. At this time Sydney would you. Please open the phone lines.
Certainly ladies and gentlemen, if you have a question at this time. Please press the star and the one key on your telephone to withdraw your question. Please press the pound.
Once again Star one question. Our first question comes from Brian Maguire with Goldman Sachs. Your line is open.
Hi, Good morning, Nathan already Wayne.
Right.
The.
Question on the current supply and demand dynamics like in preference several times, it's very tight in the market just wonder if you could talk about where you're on operating rates are on.
Plywood and.
VP and related to that in the plywood market, maybe just talk about how far out your order books are going I know.
Once you get past two or three weeks it indicates a pretty tight market, but I'm guessing were probably beyond that given how tough it is to find product. These days and yes. Just can you just comment on on how far out you've been able to lock in the current.
Exceptionally good prices are we.
Basically locking in the month of August and parts of September at this point or.
There are a lot of your volume that would still be at risk for lower prices in the third quarter.
Yes, Hi, Brian It's Mike Brown, yes on the operating Rightside, yet as I'm sure you've heard from many others were attempting to ramp up I'd say as a general statement wish that are running well I'm gonna have to sort of six days a week, where we can we have some intermittent sort of.
Downtime associated with a the positive coated cases or.
Using people through contact pricing, so yes, it varies week from weight, but somewhere around that five and maybe to 66 days a week depending on the location. We are trying to ramp up but we're having great difficulty.
Pointing people to to bring to work for a variety of reasons. So.
I really don't see us getting to a much higher operating right anytime soon certainly our intention but that might take us a few months.
As it relate to out what would a fall yep.
Our current ought to fall in the plywood side of the business extends through August and in a couple of locations now into early September said, we've been able to look into good prices that weighing on was talking about just a moment ago.
What will happen after that you'll get as good or better than mine.
Well just have to say how long the good run less.
Great.
Appreciate that.
And then just with the demand side I think you guys talked about it so much of its coming from repair and remodel. These days, obviously, there's a lot of people at home with a little bit more time in but the stimulus money, maybe a little bit more disposable income.
You guys, usually have a pretty cautious or at least balanced outlook on the market I find so to what extent give worry that some of this is just pulling forward some demand that.
You know would've otherwise been there, but may be would've been spread out over the next 12 months.
I'm just kind of the concern that we had an air pocket eventually at some of the stimulus money runs out or is as people need to eventually go back to work.
Hey, Brian It stayed I'll take a shot at that I think the I think the consistency that we've seen from the repair and remodel has been really really strong since it started co bid and we really haven't seen anything that would signal a change to that to your point the the financial position, including the stimulus money has been helpful.
I think for people in terms of investing their spend rate on things like vacations and other activities has been reduced significantly.
And then obviously, they're spending more time at home. So I think because we get a chance to see the trends look at the repair and remodel confidence into index.
We continue to suggest good momentum moving forward likely the question around.
Sustain unemployment levels that high levels is usually.
Not constructive for lot of spending activity, either new residential repair and remodel but at this point yeah. The kind of the momentum in the cadence that were seen on repair remodel we expect that to continue and again, it's been very consistent through throughout the course of code.
Okay. Just last one for me just switched over to the engineered wood products business.
It sounds like trends, there probably not as good as the rest of the business with the most of the five being tied to new housing starts, but maybe just talk about what the utilization rate is.
On that part of the business and I know there was some new industry capacity coming and just if that you're seeing any impact.
From that on your partnerships in the distribution channels or.
Any impact on pricing that you're you might be seeing from that.
Yeah, Brian It's Mike again on lost at first as it relates to the new capacity I think you're referring to the Rosebank facility in Chester South Carolina, there's still in a ramp up phase we really at this stage has seen very very modest if any impact from.
From the volume handle pricing, there's been a couple of.
Specific regional situations, but nothing of any great significance.
I have no doubt sooner or later, though they'll get through their ramp up stage and there'll be more volume come on line, but thus far it really hasn't been a major contributing factor.
As it relates to operating rates in L.E.W.P.E. Mills, Yes, we have very strong order falls.
And as a result of that I think we'll be will we will be running quite hot in the W.P. So out of the business for quite awhile.
And we sort of lanes.
Some credence to the fact that for the say the previous number of months.
Mainly I'd say.
At the district at the dealer level.
Really took their inventories down a long way so im sure whether it's the dealers or the builders.
They are building inventory in the channel and I suspect that Thats kind of go on for quite awhile and the results that I've read from the buildings that have release numbers show some pretty strong pretty strong numbers actually for the last number of months.
And the prognosis is I guess I would call it.
Quietly optimistic for the remainder of the.
And Brian Thats part of the thing that's tension in plywood market at the moment as you have a lot of the near that's getting diverted into the team manufacturing. So there was a limited ability to plywood guys to come back on with a lot of incremental volume with the that repeat them having strong.
Yeah, that's going at that but I didn't want to be too greedy with questions, but just yes, good thinking about how much of your and your your training shift over to the pilot market to take over take advantage of the exceptionally good prices. These days.
Yes sort of makes sense that there's a natural tension between the two.
Yes, and just I think.
Right I mean.
There's any say much money that I'll say is appropriate to put into DWP and we're putting all the all that money, we can possibly monster in DWP amendment, even even with these good plywood pricing.
Okay I appreciate the time I'll turn it over.
Thank you.
Thank you and then next question comes from the line.
George Staphos with Bank of America. Your line is open.
Hi, everyone. Good morning, Thanks for all the details.
I wanted to come back to the.
If that you've seen.
In BMD from.
What had been direct to warehouse sales, which has helped margins. My guess is a lot of that is being driven by.
Increasing confidence.
From builders, but not enough confidence to buy a large orders direct and so that's helping BMD.
And if that's correct assumption if not obviously.
Please go into what's been driving that do we have to worry about a mix shift negative at some point as in fact, we see more confidence in sustainability of this improvement in building activity.
Hi, George This is Nick Stokes I think your initial presumption is is part of the answer certainly as.
Dealers anticipated declines in their demand in late March early April and the combination of the uncertainty associated with covert driven by that I think they for.
Many of them made the determination that they wanted to run a little bit lead.
Then when demand bounced back their inventories were a little lean.
Order files were.
Extended primarily on the commodity products and so really it's a combination of the too a little bit of uncertainty in terms of what their demand is going to be and be a little bit of uncertainty and concern about vion six weeks out relatively high prices and so the combination of those two things.
Things.
Okay.
Prompted behavior, where they could buy it in a shorter timeframe in smaller quantities kind of adjusted and time as to your speculation about does that reverse course over some period of time I I don't worry about that too much really because.
Certainly if demand becomes more predictable and order files in price has become more predictable, we're kinda back to a status quo as opposed to a big swing to the negative.
Okay.
Thanks for that Nick.
And I realize it's hard to answer this because its.
Multiple parts and.
It's ultimately a high class problem to have but when you look at the incremental margins in BMD in the quarter.
Having recalled one that was this large and quite a while.
If there is a way to parse the 20% incremental margin versus you know what would normally be say, 4% to 5% and how that arose whether it was inventory gains commodity pricing. However, you felt most comfortable ascribing it if at all that would be that'd be helpful.
I'll give it a world here.
Certainly when the when the composite price index is run up 100, or 200 or 250 Bucks a thousand.
And that's where we're at today I realize we're a month into the third quarter.
But you think about the embedded inventory costs that we have in the valuation in the marketplace.
I would ascribe to the increase in our gross margins primarily due to.
Escalating.
Dramatically escalating commodity pricing.
Yeah, and as you know that prompts.
Volume as well as excuse me volume as well as as margin.
Certainly in the second quarter is usually a very good quarter for us in terms of mix shift to seasonal products and given.
What has already been described about repair and remodel products like decking jumps up pretty hard and so it's a combination of all the above.
And we don't spend a lot of time trying to articulate externally the unique.
Attributes of each one of those at a very finite level.
Okay.
Understood, but it sounds like it was it was what we'd expect most it was driven by the benefit you got on pricing relative to your cost.
Yeah, and the and don't Miss the volume piece as well okay.
Okay Fair.
My last two I'll turn it over real quick.
Wayne from pension plan adjustments once you're done with all the transacting that needs to occur on an ongoing basis is there much of a change in the ongoing.
Cash flow.
And then.
To the extent that we're seeing more housing activity hopefully, we ultimately get back up towards.
131 for one five in terms of start.
Should we worry much at all about a mix shift to smaller homes as for urban nice try to become suburbanites, and therefore, a shift away from DWP to dimensional or.
We'll worry about that when you have to because it'd be sure nice to get to 131 for one five thanks guys.
So let me take offense on one person then I'll talk about the housing.
On the pension.
We've had very modest cash going out from a GAAP standpoint.
Because as we pay lease payments on the two BMT properties and as we fund our nonqualified pensions I'll show up in the cash flow statement as as pension contributions and so the lease payments were making on the BMT properties will go away and we'll still have been very modest number that will slow out on the nonqualified pensions, but were also lower.
I can get legally whether or not.
It does but the cash obligations is probably about a million bucks a year.
It's it's very small.
On that.
Housing question I think there's been a trend, but really a last 18 to 24 months or more.
Median home size is declining and part of that is a lot of the big builders and trying to hit entry level homes.
And to your point, we've probably lost about 200 square feet per store or maybe a little more of a now and I would suspect within kogan environment that theres a lot of the larger builders that are building spec homes and they will be a smaller footprint and trying to pick up people that are trying to relocate out of them a multifamily environment or.
Page or Metro area, and that's where we'll see a lot of the demand, but even with a smaller footprint.
Those homes relative to a multifamily starts are probably still close to its reacts on in terms of the material demands.
Well it may not be the same has a 20 803000 square foot home somebody is building something at 2400 square feet versus building the multifamily that's still in that positive for us. So.
That's certainly been a case in May June and July as we've seen the ramp up in housing starts again.
Thank you very much.
Thank you and then next question comes from Merck Waldie with Bank of Montreal. Your line is open.
Good morning, and congratulations on a on a great quarter.
My first question is one for I guess both.
Nick and and Wayne and that really revolves around sort of managing kind of commodity price risk commodity volatility you've done a great job overtime, but we all remember 2018, so I wondered if you could give us some insights into specifically how you manage commodity price risk when we're seeing so much volatility.
City and if there are any signs that you watch for that would suggest to you were nearing a top are there any kind of yellow flag. So do you.
I have learned to watch for overtime.
More and Mark all I'll take a world out it as we've tried to articulate in the past that.
The commodity strategy that we have in all periods of time is underpinned by two two primary assumptions we want to be.
Buyers and sellers every day, we've made commitments to our customers to have product available that's quicker then.
Alternative sources, if you will we believe that creates value for the customer as well as allows us to make a margin because of our ability to deliver promptly. We've also made commitments to our suppliers to be constant Myers and.
Underpinned the those are the two underpins as you navigate your way through the ups and the downloads.
Don't try to get.
Two frisky about I guess in ourselves here and as you've seen over the years when you get the kind of run we've had for the last.
Quarter are shown.
Our on sale margins in our.
Our net margins in terms your return on sales, both escalate pretty dramatically, particularly given the dramatic nature of it and when it contracts, we give it back a bit.
And but we believe this violent sell and knowing what our customers want every day keeps us from the wide swings no we always have.
Cases, where we buy stuff and sell it for a loss if it goes if it goes down pretty dramatically to your question about what are the red flags in and how do we feel about that right now.
I would tell you that we've we've spent a lot of time focusing on what our customers expect to happen.
And.
What their behavior is sort of predicted to be in.
And we continue to do that at this point in time customers increasingly tell us that they're pretty busy there pretty uncomfortable with these extended order files from a long time. So it gives us gives us more confidence and making sure we have inventory.
I would tell you that some of the tools that weve used in terms of the old flags in the past don't really apply today [laughter] I remember 2013, and I remember 2018 and.
We all said this thing could never go down, but we always knew that it would and so I think our strategy associated with the expectation that these kind of levels are probably not in the long term sustainable.
It will just manage it as best we can and I wish I had some kind of a secret hearing that I could.
Secret handshake that I can tell you what it is but I don't know, it's kind of the basic stuff.
Okay, and Nick I'm just curious.
It's transportation and logistics and issue right now because because I've heard things about sort of the rails, particularly in western Canada, taking a lot of.
Our capacity out early in the for second quarter, and then be kind of slow to bring it back I've also heard kind of crazy situations, where you've got Pacific northwest lumber producers ship and stuff by truck all the way to new England, which is just mind boggling.
Yeah sure what you're hearing is the same thing we're experiencing work and.
I'm not smart enough to figure out the root cause of that but certainly the escalated volumes and I think in water cases, we're hearing from transportation providers to their challenge with cruise associated with reductions for covert.
But we've got a pretty good backlog right now of late cars, which is a combination of of mills running a little bit laid in terms of production as well as transportation snack foods and so to some degree it makes.
The challenge associated with having a predictable supply chain very difficult on the other handed it really makes a case for kind of the it's an opportunity for BMD two is because to the extent the rest of the world. This challenge and we have product available for immediate shipment and so it's a hell of an opportunity for us.
Yeah, Okay last one I had in distribution Nick was just maybe talk about the decking business and I'm. Just curious about two things. One is just composite decking has benefited from just the tightness in the in the treated wood markets over the last three or four months and and also.
Are you seeing anything in terms of increased competition incremental capacity coming in from some of the smaller players and composite decking.
I think it's a pretty good observation and <unk> I can tell you what our experience has been I don't want to speak for or primary decking supplier I'll leave that to them but.
As is widely noted there has been.
Shortages of treated decking material and I think the the composite decking manufacturers.
Think of conversions from wood as one segment of opportunity for their growth and I'm sure. They would tell you that.
That's occurred just to some degree our experience was in BMD is it are decking business is very very strong driven.
Hey by the conversion from would a little bit, but just in terms of other people wanting to do.
Due to the projects and some of the product mix that we've been sell on wouldn't normally be a conversion from would just given the pricing and green characteristics and those kinds of things.
As to them.
Question about additional composite decking manufacturers, bringing on new capacity I don't have any knowledge of that one way or the other more.
Okay, All right last one for me as Wayne can you.
Can you just talk about kind of cost headwinds potentially in engineered wood in the third quarter I'm, just I'm conscious of kind of west coast log prices, perhaps moving up and then also if you can just remind us the impact.
From higher always be prices.
Yes, I'll take a shot and then I'll, let Mike add to it.
As far as input cost I think the most notable changes is going to be.
On our speeds, we have a trailing average contract and and obviously with prices moving up sharply as they had as we drop weeks off the back and will replace them with weeks at a higher price. So I would expect or Oh, let's be costs go up fairly substantially as an intensity I joists, we use about.
One square foot Evault, SB, reverie, lineal, but I joist.
As far as.
Lumber cost impacting DWP, we do have a solid on plan. There. So we use in new Brunswick at our small I joist facility. So we'll see a little bit of cost input pressure they said.
On the pricing impacts.
That facility, but again, it's relatively small part of her overall either BP.
Production and that and then northwest as you noted there's been some movement and log costs.
And typically we see that sustained.
Lumber pricing.
Quite high so I would expect spot pricing for logs in the northwest to move up we really haven't seen much in the way a while costs exploration in the south and giving.
In understanding inventories in the south.
For us I wouldn't expect much escalation in log prices now.
But other than potentially cutting all costs coming up as demand recovers that theres.
Issues around transportation, but it would be more transportation, driven and stumpage Sal.
Okay. That's super helpful. Thank you and good luck in the third quarter the rest of year.
Thanks, Mark Thanks.
Thank you and our next question comes from Rubin.
The benchmark company your line is open.
Thank you good morning, everybody good morning, everyone.
Most of my questions have been asked but maybe HM.
I think I just have one less the.
If we see housing starts growth return.
This quarter is there any reason or I guess could you discuss the reasons why your growth may.
Be more or less whether it's your capacity availability in the WP.
Or geographical differences between what the broader market might be seeing or.
Smaller homes has been mentioned is there any reason why.
Wouldn't expect your volume growth in wood products to be kind of comparable to two it starts ramp.
No it should be comparable because with our national footprint through.
Dan, particularly in our other wholesalers that we sell through manufacturing operations are distributing nationally it can respond basically wherever there's geographic strength. So.
Thanks.
Sticking on the wood product side.
It won't mirror, what happens on a national basis.
Okay, and then actually I do one other one them to sneak in.
You W.P. pricing I know there were some expectation that you might see.
Pressure there at least you know earlier in the year does has anything that's going on.
The the expected ramp and growth the maybe a shift in where houses are being built.
The inflation inflationary environment in any of your input costs is there any reason why maybe you could potentially actually push price in E.W.P. or maybe just talk about what the price cost environment looks like for you guys. I know you just kinda laid out from high level thoughts, but what did that how does that stand from a price cost standpoint for you and needed.
And thank you guys and congrats on quarter.
Yeah I'll let.
Mike add on to this but as a general rule, we didn't off price or our E.W.P. based on cost inputs.
Based on supply and demand and right now the demand is quite strong.
And a lot of.
Lead times stretched out you know the PD for ourselves and others.
We're trying to keep all of our service through service programs in place and so far we've done pretty successful on doing that.
But thats the tension on the supply and demand as what would drive the pricing on DWP into your point if prices stay flat on AWBC, we will see some margin compression, but let's be costs and lumber input costs going up.
I think we'll know more as we get into.
August and September in terms of how sustainable demand is moving into the fall and and that.
Strength wouldn't be drug price increase not input costs.
Right.
Thank you enter next question comes.
Sure.
Your line is open.
Good morning, Steve Yes, good morning, everyone.
So forgive me first of all my memory is not great but are there any facilities that were running in Q2 19 that were not part of the family in the quarter just ended.
I believe the footprint was the same other than Roxboro, which was producing it at a very limited level.
So.
Shouldn't make much of it change at all year over year.
Gotcha, and so we've got no commodity prices are up about 30%.
Running full blast to.
To the best you can with the exception of maybe some coated.
Absenteeism.
I mean.
And in any Q2.
Basically started with April down.
Or maybe operating rates.
70% in April and then ramping backup as fast as you could you think with a full quarter of full production, we could see the margins creep into the mid teens in wood products.
I'm going to Jeff, Jeff It's Dave.
I wish I was up as optimistic as apparently you.
I'm not from the fact that we're not trying to run.
Full blast I think was the expression you use but we're not running pullback fan.
And particularly in the southeast and United States, We're tracking obviously the impacts of covered related issues.
But you're right you quarter over quarter, we took out round numbers roughly at the excuse me about a quarter ago plywood production capacity, which on the last call last quarter. We said, we're going to dual that what we did.
The challenges we are unable at this point in time.
Run to allow facilities 24.
At best its five and a half to six days a week and we're having a desperately difficult time.
Getting enough April.
To ramp back up to seven days a week, if we could I can assure you we would.
So.
I think it will be some number of months at least given the number of people that we we are looking for before we could honestly side that we would be able to run 24 seven.
But since leaving in Iraq and response, but Steve to your comment if if the pricing levels we've seen.
The end of July.
Were to hold through the month of August.
And into September.
You would see us substantial step change and the operating margins on the what products business purely due to price implied.
And while.
It wouldn't be.
Quite as good as running seven days a week.
The profitability jump in wood products would be substantial third quarter.
Well I'm just I'm looking at slides eight nine in this parabolic Lou.
In.
The lumber and panel comps it's gone.
No.
Give me, a parachute or or something it's incredible.
And with respect to the pricing in.
Engineered wood.
Clearly.
As the salt what's on substitutes go up they become more compelling is there something and also as always be as an input goes up you want to cap you want to recoup that.
Is there any thing in the pricing mechanism that prevents you from putting in a price hike at this point in time or is it because things are.
Our negotiated kind of far in advance.
So.
Steve as it relates to AWB pricing in this is kind of what wind touched on just a moment ago.
We look very carefully at each individual market and what's happening in the market any mobility.
To service the customers in that market and also obviously that relates to how much on the ground inventory, we have any on manufacturing footprint to be able to basically produced product every day I.
I think just at the moment.
The.
The issue is more around the strong waterfall we have.
The amount of volume, we moving through the system is not quite as high as we'd like as I mentioned, we're not running 24 seven.
And meloni inventory on the ground inventory levels, and not quite where we'd like them to be.
So I'm not saying that they wouldn't be an opportunity for some price adjustment will increase.
A bit further down the track, but right at the moment, we're focused on servicing our customers and getting our inventory in shape before we feel we take that particular.
A particular issue under consideration.
Okay, and I recognize the call so hopefully my questions.
Maybe that repetitive open up full blown redundant.
Hey, what is the biggest risk for distribution aside from maybe a one two punch from covert is it a rapid decline in commodity prices I mean, Mark will do you alluded to 2018.
Right.
Yeah that would leave you with an inventory write down is it I know you guys turn your inventory quick is that the biggest risk.
Steve This is Nick I think certainly in the next 60 90 days.
If the prices previously described come off dramatically.
We will have inventory, that's not worth as much as what we paid for it.
And so we'll have that dynamic.
Okay.
But as long as demand remains strong.
To your point, we'll continue to turn those inventories we want to be again buyers and sellers everyday and we got to find a price that the customers are willing to pay and sometimes that.
A short term wakhan.
But it keeps the would flow on.
I think.
The other risk that I think a little bit about.
There's really not anything we're going to be able to control and that's just the.
And then Weve made allusions to it several several times in the call today is.
One of the overall impact of coven or ability to keep location staffed and the ability to have locations continue to operate against the backdrop of municipal guidelines and those kinds of things but.
We've been living that for the last five months and.
How you can speculate on.
Well not until the cows come home, but you won't be able to react to it to you wake up one morning and deal with it.
Yeah.
Alright, well, thanks, everyone stay safe.
Thanks, Steve.
Thank you and your next question comes from George.
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Thanks, Hi, guys. Thank you for taking the follow on so two quickies for the yen. One can you just give us a quick update on the latest with the door shop strategy, how that's progressing and then.
Recognizing that ultimately you wanted to balance the near between CLI and he W.P. and.
I have to be keep market.
Height in both areas any thoughts at this juncture about maybe needing some more of a near capacity down the road any update there would be great. Thanks, and good luck in the quarter.
Hi, George This is Nick I'll take I'll take the door shop as Weve articulated to this audience before we continue to believe that expanding our door fabrication.
No pre hanging ability as a big strategic opportunity we've taken a lot of steps over the last few years to both add to our existing capacity as well as Brett venturesome soon into some new markets at the first part of the year we [noise].
Wherein in line to start up our Texas door shop in Dallas that was delayed by 45 days call. It just because of equipment and.
Kind of impacting covert late in the first first quarter, beginning with second quarter, having said that we're fully ramped up we're fully staff. We've got the equipment, what we've been running really hard to last.
40 ish days, and we're very very happy with.
With the level of sales the degree of customer interest in them and the level of supplier support and kind of a difficult supply environment. So we're pretty pretty happy with what we have we're or I'm going to continue to invest in our existing facilities to increase capacity and broaden the volumes and.
The capability as well as the product mix and we'll continue to to review opportunities to put those door shops and in new and more geographies.
Mike you want to take the second part of that in that regard to the near capacity.
Yes sure line.
Yeah, George so.
I guess a couple of comments about.
The funniest side of things.
It's selling tension and has been for long timed to put as much avail internally generated veneer as possible into AAMC.
Except for the extraordinary case, we simply just make a lot more money out of the WP than we do out of plywood on the equivalent unit basis.
So we continue to look close I would call them in it innovative ways.
To get more of the venue that we produce today into an E.W.P. type product either the products that we make today or some other type of product that we may be out of the Mike in the future.
So from that perspective.
It's a it's a matrix that we measure every month, how much of al internally generated beneath it goes intelli WP products.
We also have some very long standing strategic partners.
Supply aspenone, a when needed we've been doing business with.
Most of these folks for long time.
And that's good for them, but it's also good for us because it's a sort of a win win situation.
So as it relates to your question specifically around do we need more beneath production capacity.
Given the footprint, we have today with L.E.W.P. facilities.
I think it's unlikely that we would.
Make a an additional investment or take another four I into what I'd call extra Vinny it production capacity simply because it.
We feel we might need it some years down the track.
When do you want adding to that.
Yeah, I think the only comment I'd make this we are through some of our capital spending like dryer projects in Chester, South Carolina, and we've got modernization going on in the log utilization Center Florien, Louisiana and those projects will result in a little bit more incremental production, but more importantly, they really bring down the cost.
Structure, the mills and improve our reliability, so Mike standpoint, we'd rather flex to the peaks by buying outside been here and try to make sure that they've been here that we need on a steady state basis has produced at the lowest cost possible.
Makes sense alright, guys. Thanks, very much again have a good quarter.
Stuart.
Thank you and I'm not showing any further questions at this time I'd now like to turn the call back.
Great. Thanks, everyone. We appreciate everyone joining us for this morning for our update and thank you for your continued interest in supporting Boise Cascade, Please be safe and please be well. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.
Right.
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