Q4 2020 Boise Cascade Co Earnings Call
Good morning, My name is for lean and I will be your conference facilitator today at this time I would like to welcome everyone to Boise Cascade's fourth quarter, 'twenty and 'twenty conference call.
All lines have been placed on mute to prevent any background noise.
And after the Speakers' remarks, there will be question and answer period.
If you would like to ask a question and during that time simply press star and the number one on your telephone keypad.
Questions will be taken in order the RV season.
If you would like to withdraw your question press the pound key.
For 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 expectation and today they are not subject to a number of business risks and uncertainties.
Actual results may differ materially from those expressed or implied in this call.
For a discussion of the factors that may cause actual results to get there for them to their for from the results anticipated.
Please refer to Boise Cascade suites and filings with the S E T.
It is now my pleasure to introduce huge away for anchored.
So I can't even vice President CFO, and Treasurer Boise Cascade Mr.
And Mr. Ankur and you May now begin your conference.
Thank you will and good morning, everyone I'd like to welcome you to Boise Cascade's fourth quarter 2020 earnings call and business update.
Joining me on today's call are Nate Jorgensen, our CEO, Mike Brown head of our wood products operations, Nick Stokes head of our building materials distribution operations, and just strong and coming out of our building materials distribution operations, Nick has announced his retirement.
And for March of this year.
Turning to slide two I would point out the information regarding our forward looking statements. The appendix of the presentation includes reconciliations from our GAAP net income.
To EBITDA and adjusted EBITDA and segment income for the segment EBITDA and.
And that I will turn the call over to Nate.
Thanks, Wayne and good morning, everyone. Thank you for joining us for on an earnings call today I am on slide number three.
Fourth quarter sales of $1 5 billion were up 34% from fourth quarter 2019, our net income was $26 million for 66 per share compared to net income of $14 6 million or <unk> 37 per share and the year ago quarter for.
Fourth quarter 2020 results include a noncash pension settlement charge of $6 2 million for 12.
For the 12 cents per share after tax related to the elimination of our qualified defined benefit pension plan.
Fourth quarter 2020 results also include a $38 8 million income tax expense for <unk> 98 per share related to the release of stranded tax effects upon elimination of our qualified defined pension benefit pension plan.
And fourth quarter 2020, total U S housing starts increased 12% compared to the same period last year.
And our family housing starts the primary driver of our sales volumes increased 30% given the extraordinary market conditions caused by an ongoing imbalance between industry supply and and product demand for wood based commodities, both businesses delivered higher than expected operating and financial results during the period.
Our wood products manufacturing business reported segment income of $40 8 million and the fourth quarter compared to $8 1 billion and the year ago quarter.
Wood products continued its focus on establishing pre COVID-19 manufacturing production levels and response is strong and product demand, particularly for our AWP business during the fourth quarter.
Our building materials distribution business reported segment income of $67 1 million on sales of $1 3 billion for the fourth quarter compared to $26 3 million of segment income on sales of $1 billion and the comparative prior year quarter.
BMD sales and income were strong and our long term strategy and commitment to consistently carry a broad based and in stock products supported by high service levels and a solid financial position continues to deliver value to our vendor and customer partners and the supply chain as well as our shareholders.
Wayne will walk through the financial results in more detail and then I'll come back and provide our outlook before we take your questions Duane.
Thank you Nate I'm on slide for wood products sales and the fourth quarter, including sales to our distribution segment were $358 7 million compared to $296 3 million and fourth quarter 2019.
As Nate mentioned wood products reported segment income of $48 million and the fourth quarter compared to $8 1 million and the prior year quarter.
Reported EBITDA for the business was $54 5 million up from EBITDA of $22 $7 million reported and the year ago quarter.
The increase and segment income was due primarily to higher plywood and lumber sales prices as well as higher I joists sales volumes. These improvements were offset partially by higher wood fiber costs as well as lower net sales prices of AWP.
BMD sales and the quarter and were $1 3 billion up 35% from fourth quarter 2019 sales.
Sales prices and sales volumes increased 26% and 9% respectively.
Business reported segment income of $67 1 million or EBITDA of $72 $9 million and the fourth quarter.
This compares to segment income of $26 3 million and EBITDA of $31 6 million and the prior year quarter.
The increase and segment income was driven by a gross margin increase of $45 4 million, resulting primarily from improved gross margins on commodity products.
As well as higher and higher sales of general line products and AWP compared with fourth quarter 2019.
This margin improvement was offset partially by increased selling and distribution expenses of $4 1 million.
The amounts for unallocated corporate costs and other items impacting our reported adjusted EBITDA can be found and the tables of our earnings release.
Debt net of those items was negative $14 $3 million and fourth quarter 2020, compared with $9 million and fourth quarter 2019. The increase was due to a noncash pension settlement charge of $6 2 million and the fourth quarter 2020 related to the elimination of our pension plan.
Turning to slide five.
Our fourth quarter sales volumes for I joist were up 27%, while sales volumes for our LVL were down 2% compared with fourth quarter 2019.
Demand for AWP continues to be strong as we move into 2021 for.
Fueled by increased housing starts and a higher proportion of single family starts.
Pricing and fourth quarter for Hi, Joyce and LVL were down, 2% and 1%, respectively compared with third quarter 2020, due to temporary price protection arrangements.
Wood products announced multiple list price increases for both LVL and I joist late in 2020, we expect to see the benefit of the less price increases phase and over the next several quarters.
Turning to slide six our fourth quarter plywood sales volume and wood products was 305 million feet compared to 315 million feet and fourth quarter 2019 are.
The lower volume for plywood sales reflects our continued work to optimize veneer and indeed, AVP production as well as periodic short term disruptions related to COVID-19.
The $407 average plywood net sales price and the fourth quarter was up 62% from fourth quarter 2019.
Plywood pricing in October and November 2020 fell sharply due to improvements and industry plywood production effectiveness increased imports and shorter lead times for orders, particularly in the southern U S.
However, plywood pricing rebounded in December 2020, and has continued to increase and remain at elevated levels and early 2021.
Moving to slide seven Bmd's fourth quarter sales were $1 3 billion up 35% from fourth quarter 2019 with prices up 26% and volume is up 9%.
By product area Bmd's commodity sales increased 62% general line product sales increased 16%.
And <unk> sales increased 15%.
Gross margin dollars generated improved by $45 $4 million and fourth quarter compared with the same quarter last year.
The gross margin percentage for BMD was 13% consistent with fourth quarter 2019.
Fourth quarter 2020, gross margins decreased from third quarter 2020, due to the sharp decline and commodity wood products prices during the first two months of the quarter.
Bmd's EBITDA margin was five 5% for the quarter up from the three 2% reported and the year ago quarter, primarily due to improved leveraging with selling and distribution costs.
Slide eight shows the sharp rise and lumber pricing and the second and third quarters of 2020 and fourth quarter 2020 lumber pricing fell sharply during October and November before a strong pricing rebound in December.
Strong demand and when coupled with capacity constraints created supply demand imbalances and the marketplace and historically high pricing levels for commodity lumber and panel products.
Pricing movements from the current levels and 'twenty 'twenty, one will likely be determined by the strength of end market consumption and industry operating rates.
On slide nine one can see the same pricing pattern for the random lengths composite panel index, which decreased during the first two months of the fourth quarter as many manufacturers work towards restoring their production to near pre COVID-19 levels imports increased and customer orders and we're able to be filled and shorter timeframes.
However panel pricing rebounded in December 2020, with mild winter weather better than expected demand and continued industry operating challenges pricing has continued to increase and remain at elevated levels and early 2021.
Yes.
On slide 10, we have set out the key elements of our working capital company net working capital excluding cash income tax items accrued interest and dividends payable.
Increased $79 9 million during the fourth quarter.
Accounts payable and accounts receivable decreased with the seasonal deceleration of sales and purchases.
Inventories increased due to strong and product demand and a slight improvement and the supply chain.
Consistent with our historical patterns, we expect working capital increases to use cash and the first quarter of 2021.
And the statistical information filed as exhibit 99, two to our 8-K has the receivables inventory and accounts payable data broken down by segment for those that are interested and the detail.
I'm now on Slide 11, we finished fourth quarter with $405 million and cash our total available liquidity at December 31 was approximately $751 million, which reflects our cash and availability under our committed bank line.
We had 444 million of outstanding debt at December 31, 2020.
In December 2020, we eliminated our qualified defined benefit pension plan through lump sum payments to participants and transferring the remaining liabilities to Prudential insurance, we recorded a noncash settlement charge of $6 2 million in conjunction with the transactions and.
In addition, our balance sheet included the stranded tax effects of our underfunded pension at the time of our conversion from a limited liability company to a corporation in 2013.
And the adoption of the tax cuts and jobs Act in 2017, the stranded tax effects of $38 8 million were required to be released into income tax expense during fourth quarter 2020, with the pension plan and elimination.
Our effective book tax rate is expected to be between approximately 25% and 28% going forward.
We expect capital expenditures in 2021% to total approximately $80 million to $90 million.
And this level of capital expenditures could increase or decrease as a result from a number of factors including acquisitions.
Efforts to accelerate organic growth exercise of lease purchase options.
Our financial results future economic conditions and timing of equipment purchases.
I am pleased to note that we returned $79 million and regular and supplemental dividends to shareholders. In 2020, we remain well positioned with sufficient cash and reserve.
To support our internal growth initiatives anticipated working capital uses as well as opportunistic acquisitions as we move into 2021 our.
Our objective remains to successfully grow our business, while generating appropriate returns on shareholder capital.
Nate I will turn it back over to you to discuss our business outlook.
Thanks, Wayne I'm on slide number 12, while there continues to be heightened level of economic uncertainty given the pandemic low mortgage rates continuation of work from home practices by many of the economy and demographics and the U S have created a favorable demand environment for new residential construction, which we expect to continue in 2021 for.
Furthermore, with many homeowners spending more time at home repair and remodel spending may remain elevated as homeowners invest and existing homes.
February Blue chip consensus for U S. Housing starts is 151 million for 2021, although we believe the current U S demographics support the higher level forecast and housing starts and many national Homebuilders are reporting strong near term backlogs and the impacts of COVID-19 on residential construction and repair and remodeling activity are uncertain.
Aside from higher OSB input cost and an I joist, we continue to see favorable cost improvements and efficiencies and our manufacturing operations.
Wood products continues to make an effort to restore production rates for pre COVID-19 levels and response is strong and product demand, particularly for our AWP business.
There is continued focus on innovation and reduce our cost as well as establishing products and services to address market opportunities and the commercial use of mass timber as.
And as previously announced we have reduced production at our Elgin, Oregon plywood facility as we continue to work with the Oregon Department of environmental quality to resolve items associated with the management of our wastewater permitted levels.
With the recent winter weather over the last week, we've experienced production losses, and our southern manufacturing operations as well as distribution center disruptions. We expect these events to be short term and have experienced no significant facility damage.
And the distribution arena BMD has done a terrific job of executing and responding to market opportunities both at the local and national level.
Effectively managing the impacts of commodity price challenges will remain in the forefront of our distribution group and 2021.
Strong demand when coupled with capacity constraints is created supply and demand imbalances and the marketplace and has resulted in higher than normal pricing levels for commodity lumber and panel products.
As a wholesale distributor a broad mix of commodity products and manufacture of certain commodity products, our sales and profitability are influenced by changes in commodity product prices.
With uncertainties and demand and difficulties and judging the appropriate operating rates commodity wood products pricing could be volatile and the months ahead, we will react appropriately.
As we wrap up our formal comments I want to express my appreciation for the focus of our associates and managers, who maintain on safety taking care of one another and the communities and which we operate as well as our customers and other key relationships third performance of the pandemic as well as last year's Hurricanes and Louisiana at the wildfires and the west has simply been inspiring.
We will continue to be guided by our values of safety and integrity respect and pursuit of excellence, we will successfully get to the other side of this pandemic 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.
Finally, I'd like to take this opportunity to thank and congratulate Nick on 42 years of outstanding service and dedication to Boise Cascade.
And the impact Nick has made on BMD and the company is clear the bnb culture reflects his passion commitment and drive for excellence as energy experience and relevance along with his wit and many unique expressions will certainly be missed and Boise cascade.
Nick I set a very high standard for our organization I have full confidence and Jeff building on the success and momentum and BMD. We move forward with great clarity on what made is what has made <unk> successful and what we'll maintain that we will maintain that discipline and focused approach as we move forward as a team Nick.
Nick all the best for you and Carol as you move into your well deserved retirement at this time, we welcome any questions. Operator would you. Please open the phone lines.
Thank you at this time I would like to remind everyone and I'll go to ask some question Press Star then the number one on your telephone keypad and again that is star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
We have our first question coming from the line of George Staphos with Bank of America. Your line is open.
Thanks, everyone and good morning.
Congratulations to you thanks for everything and.
Jeff We look forward to working with you as well.
Gratulation zone.
Our performance this year as well and guys.
Two questions and I'll turn it over one short term one longer term.
Can you give us a bit of color in terms of I mean, it's not <unk>.
<unk>, but there was a bit more decline in pricing and I joists, and the fourth quarter versus what we're seeing and the prior quarters and also versus LVL and what was causing that was that just a mix issue or something else and then on the balance sheet using looking at the balance sheet, and considering where you might apply capital over.
Your numerator and all the normal.
And targets can you talk us about how you see acquisitions evolving for Boise over time would you be interested in.
Perhaps.
And being opportunistic and wood products and there is something attractive.
And and attractively priced or is it really going to be more about growing BMD.
BMD out thanks, guys I'll turn it over.
George It's Mike how are you doing Mike good morning to you.
You too, yes, so the whole issue around the price declines that you referred to.
And I think Mike might have made some commentary.
Actually last quarter around this but yes.
And last year was sort of a year of a couple of different stories.
Earlier in the year, when we thought demand was falling off dramatically.
We went out into the marketplace to sort of shore up.
And the situation.
And as a result of doing that.
We put in place and programs to ensure the the.
Demand would be day and later in the year and.
And out to wells that have changed on us somewhat.
And of course, they have demand later in the third and fourth quarter, particularly to call.
As it relates to the.
The differential decline and we have some price protection.
Plans in place that allow the dailies to forecast for the build is what the expected next quarter's pricing.
We'll be for the for the products and as a result of that when you mix those two things together.
You end up with a situation where at the end of the year out pricing was down relative to what most people had originally anticipated it should be.
And we expect to see obviously going forward and some modest increase.
And the coming quarters as the as the price protection flow was off and the price increases start to take effect. It wasn't anything, particularly significant that made the deal I joist number.
A little bit different to the LVL number. It's just the combination of obviously I joist demand was up.
Might significantly relative to the prior quarters and also relative to two LVL and <unk>.
Some degree I guess it was a high quality problem right. The more volume you had your exacerbated the problem.
And I see.
And it.
Should we just if I can interject quickly should we expect some year on year improvement starting in the first quarter I don't know if you want to get that fine.
With the guidance, but just quad.
Qualitatively what would you expect.
I think we will see some modest improvement and each of the quarters as we go through the year.
And I wouldn't expect it and it all come at once because it and ebitdas without price protection programs.
And I think Wayne and probably has a fairly clear set of commentary he might like to add on how he sees the price protection rolling off and the impact it might have on AWP product lines.
Well, if you look at 2% sequential increase and pricing from <unk> for.
For SKU, George It would still leave us slightly below the Q1 and 2020 number.
So it will probably be somewhere close to flat, but I wouldn't expect big improvements relative to Q1 and 2020.
Understood.
And then George maybe yes.
Yes go ahead.
Sorry, George It's Nate just take your question on acquisitions over time, and how we're thinking about that I think we're.
Committed to growth really in both businesses, So I think for starting with BMD.
Continue to look at expansion of our footprint within our current locations in terms of product and services.
Some geographic opportunities as well as continue to grow our millwork and specifically our door segment.
And we've announced a couple of those are Houston was our most recent so that will continue to be important part of our path forward relative to BMD and I think for wood products will continue to focus on and.
And.
Innovation in terms of the work that we're doing and our facilities but.
And the opportunities that I mentioned around mass timber, we think that thats.
And important opportunity for our company and our industry and.
We would see investments and that area moving forward as an organization.
So I guess I was just kind of summarize as we described in the past we will continue to evaluate opportunities for the best use of capital and support of our strategy, but growth remains an important one as we move forward.
Okay.
If I could just ask one last thing there.
And here would you therefore, net that you're ever going to rule out anything but would that tend to deemphasize growing via acquisition and wood and areas that youre already and since it seems like you are trying to as you mentioned.
Leverage innovation and mass timber being one example of that or is that.
Too fine a point and I can't rule out anything.
Yes, I think George is probably a little too fine a point I mean, I don't think we will rule out anything obviously, our commitment is to continue to supply our customers for a range of frame and materials product services that they expect from Boise Cascade.
So I would probably get it too fine a point on that but.
But in terms of some of the things that we're kind of leading into specific to wood products it would be.
Certainly mass timber and that opportunity is something that we think it's going be important moving forward. Thank you very much Nate and I'll turn it over thanks.
Thanks George.
We have our next question coming from the line of Mark Wilde with Bank of Montreal and your line is open.
Good morning, guys and looking at your stock price linked and no. Good deed goes unpunished.
Yeah.
[laughter].
Sure.
And anyway.
I guess, the startup and I'm just curious with these prices for both panels and lumber up and Nosebleed territory are you seeing any signs of either material substitution or conservation by builders in response to the higher prices I know going back 15 years ago, there was a.
A lot of talk about steel studs, and I don't know, whether and kind of like commercial people will toggle back and forth between kind of metal and wood, whether you're actually seeing builders pull back activity at all.
Hey, Mark it's Nate.
In terms of substitution, we haven't really seen anything material and to in terms of product substitution I think most products and services.
Kind of tethered to housing specifically single family is really pension debt. So in terms of excess capacity anywhere we really are seeing it across the again many of the different items that.
We cover and Carrie.
In terms of people pulling back.
Maybe some early signals.
For someone has project flexibility in terms of timing.
I think given to your point the significant costs that we're seeing on commodities.
I think there is perhaps a little bit of hesitation building and the marketplace not unlike what we saw maybe in the fourth quarter of last year, but overall the momentum feels very strong as we stand today, obviously, we had a bit of a weather disruption.
Last week across several of our markets, but they seem to be returning to normalcy.
And a very quick order so no no material substitution that we're seeing and maybe some signs early on and trying to maybe a few select projects that people are a little bit hesitant at some of these higher prices and if they can push a project there and they are perhaps looking to do that.
Okay, and then is it also possible to talk about through your distribution, what youre seeing and the way.
Increased imports of lumber and panels and there have been some articles about bolt and the trade press recently.
Nick do you want to.
Walked out.
It's a question for.
Good morning, Mark and ill, let Nate I'm sure I'll, let Mike chime in on on plywood I think he's closer to that in terms of some of those dynamics from the distribution standpoint.
On the on the commodity Woodside.
The Europeans have always had a bit of a presence and.
And this is anecdotal at best but it seems like Theres more wood available just given the pricing opportunities and some of those offshore guys might have.
Yes, maybe I can.
And maybe mark on Brazil, the last numbers I have are from January.
And they brought in.
Just under 67000 cubic meters and.
In January.
And if you go back to.
Summer of 2020 at the high point.
They exported a 148000 to the U S and the January number is actually below December and Thats fairly typical early in the year that will direct to Europe, a lot of that volume before the tariffs go on and then we typically see a shift back to the U S market and the April may timeframe.
Okay, Alright, that's helpful.
And then.
Yeah, Mike and the panel market yes.
Yes.
He has a couple of pieces of anecdotal information I was told yesterday by somebody that.
The United Kingdom is sort of hanging out.
For it to the European lumber businesses.
And I sort of went like this.
Whatever the United States will pay you to see and did they will pay you $100 more to send it to the UK.
So and Thats what it gives you some flavor of the type of market that we're experiencing so.
And obviously.
Wood products, Boise, Cascade, and wood products in Colombia, and putting business, but that sort of gives you. Some flavor of the challenges that are presenting themselves and the lumber side of things to wines good points about Brazil.
The volume from Brazil, and last year was up like 28% year over year, so quite a significant amount of about 215000 cubic meters more plywood.
And yes. She has started off at a good lick so the 67000 cubes that that.
<unk> that's twice as much as was imported in January of 2020.
So it's not that the Brazilian and understanding a lot of plywood because I am.
And it's still not enough.
We have prices that are sort of the nosebleed territory. So it'll be interesting to see with the weather. The volume continues to climb as volume as it did last year accounts you any good reason why it wouldn't.
Okay, and then just a couple of quick ones for you can you just remind us of sort of where you would want to kind of target leverage I mean, Europe virtually net debt free at the end of the fourth quarter. You did mentioned working capital as a use of cash and the first quarter, but just help us think a little bit about that kind of going forward and then also.
Maybe remind people a little bit of what you do to kind of manage downside risk from commodity prices at these levels.
Yes, so on the on the cash position normally.
Pandemic, we would have said.
Gross debt to EBITDA somewhere around two and a half and enough cash to take the net leverage and to the high ones close to two.
And we've been maintaining higher cash balances for.
Really sleep insurance, given the uncertainties around COVID-19 and some other growth initiatives debt.
Nate referred to.
Okay, and then just to kind of come out and just managing the commodity risk.
Yes, I think the.
Things that we would typically do is shorten up.
Our orders and BMD and tried to be very tightly matched in terms of what we're buying and what we're selling.
And.
This is directional as opposed to absolute but if we and a normal commodity environment might have three to four weeks' worth of wood.
We feel like it's getting toppy, and we may or may shorten that to two to three weeks, but it's really focused around trading every day and making sure. We're never out of volume because we use that volume and commodities to really be efficient on the logistics side, which is why we keep somewhere around 43 ish percent of our sales and.
And the commodity wood products as we think it gives us a real advantage unveiling trucks and service levels to customers. So we view it as in stock available all the time and don't really try to play the cycles, we may shorten up a little bit but it's not.
With strong views on positioning relative to commodity pricing and frankly.
Our teams did a phenomenal job in October and November which is part of why the fourth quarter results were strong as they were I realize we had a pricing recover and December but they stayed out of the way on a lot of the damage that would normally occur on a sharp sell off so hopefully we will be able to do the same thing and 2021.
Okay, and Thats really helpful. Thanks, guys I'll turn it over thanks.
Mark.
Okay.
Our next question coming from the line of Reuben Garner with benchmark. Your line is open.
Good morning, everybody.
Maybe starting on the BMD side.
Im looking at it the right way.
And fourth quarters, the pricing environment was kind of.
I guess neutral to some extent and maybe correct me if I'm wrong, but your EBITDA margins and in those quarters were kind of and the four five to five five range is that kind of a new level.
And the BMD business.
Or are there other benefits or maybe I'm thinking about the commodity part wrong and you had some from some benefits on the commodity front.
And just talk to talk to us about those are I think well above where your previous targets where from a from an EBITDA margin standpoint for the BMT Division.
Yes, Reuben this way and and all Nick can comment after me if he wants to add anything I would tell you and normally we would think of somewhere around three.
And three and a half as EBITDA margin and BMT.
That may creep up as we continue to grow general line and some other things, we're doing and the door business that.
Carries more investment.
And usually where and the mid to high elevens on gross margin, assuming commodities are somewhere at a normal price level, and it's representing 43% to 44% of sales.
And then the Opex.
And would be.
And somewhere in the AIDS to get you to kind of that $3 five number and <unk> and.
And obviously, we're trying to move that number up.
But I don't think we're creeping to a 5% EBITDA margin as a normal state of affairs that is really reflective of the and.
Additional leverage we got on expenses because of the exceptional margins, we had on commodity products and the last 12 months.
Okay, Great and then.
Do you guys use.
Consignment much in the BMD division when prices are elevated like this is there any protection.
For your gross margin.
Assuming that there is some rollover and.
Our volatility and the commodity prices and the coming.
12 to 24 months.
Hi, Reuben this is Nick.
We have.
Selected programs with selected suppliers with selected products, it's not a it's not a large chunk of what we do.
Certainly if we get an environment, where we anticipate.
Pretty severe pricing decline and the commodity.
Rina will engage in conversations with suppliers to mitigate the risk associated with that and that.
Take many forms but it's not a big part of what we do know.
Okay.
And then last one and I'll sneak in and so.
Can you talk about the.
<unk>.
Utilization and AWP for for the industry I guess.
And so the question is I'm, a little surprised that maybe there isn't more pricing power in this market given the strength that we're seeing.
Across the <unk>.
Housing industry and the kind of growth rates you just saw in the fourth quarter and given how tight really everything and building products is pricing seems to be up.
And just about every category on a year over year basis.
It likely that we're going to see more price increases as we move through 'twenty, one and the AWP or is there something else going on that debt with limited.
Yeah, Hi, Ruben it's Mike.
I guess ill and try to answer this bye bye.
And by component.
So I think generally speaking.
The industry is trying to produce as much AWP as it possibly can.
And I can certainly state that is a fact for Boise Cascade.
And of course, there have been many.
Impacting variables and the last let's say six to nine months gross COVID-19 being one of them.
And then other natural disasters.
Wildfires, and the west and Hurricanes and the south and.
To some degree.
Some downtime at some produces judah due to other issues.
But.
And as time goes on and I think the industry has some incremental but not a huge amount of incremental.
Supply that they can bring online.
And as it relates to the.
The pricing power question.
And this industry and general tends to have a more a long term focus it's not really a commodity pricing model that you used and AWP.
So as a result of that.
And the variations and price either up or down just tend to follow the usual commodity lumber and plywood.
Variations.
Will prices go up and the future Youll guess is probably as good as mine if demand remains as strong as it has been.
And supply is sort of where it's at today and I guess the allure of economics would suggest that there is some opportunity for some incremental price increase and the future, but there are many many contractual related issues that would have to be worked through with most of the AWP.
Manufacturers', there's just not as easy as walking out and.
And implementing a price increase tomorrow, and seeing and full straight to the bottom line.
And really just nothing like the commodity side of the business.
Thanks for that Mike.
And I appreciate the answer and congrats on the close to 2020 guys. Good luck and.
And the rest of this year.
Thanks, Robin and thanks Curt.
Okay.
Our next question coming from the line of Kurt Yinger with D. A Davidson your line is open.
Great. Thank you and good morning, everyone.
Good morning, Curt and good morning, I, just wanted to start off on PMD gross margins and just given the persistent inflationary trend and here in Q1, I mean do you think gross margins there could kind of approximate the high watermark set and the third quarter of 'twenty or are there any big offsetting factors, we should be at.
There are.
Hi, Curt this is Nick so the third quarter.
Take them in reverse order, there and the third quarter.
And as you can see from the charts and the package this morning pretty spectacular increases.
And composite pricing both on the panel and the lumber side.
Having the expectation that.
And that dynamic from here going forward.
And we don't think we will get 40% 50% price.
Volatility increases from where we're.
Sitting today.
And as we've talked before.
Our gross margin is a function of the trajectory of price.
So and commodities, even more than the absolute level of price.
And the mix between general line.
And then AWP and commodities and I think Wayne historical guidance is probably appropriate and normalized.
What he talked about a few minutes ago, but I don't think youre going to get 40, and 50% price increases from where we're sitting today.
Yes.
Okay, Alright, thank you for that day.
And just on the LVL volumes and the quarter being down year over year.
Was was your ability to produce the nir.
Or I guess source from here from a third party, a real constraint and that kind of relative to the growth that you saw and I joist.
Yes, Hi, it's Mike.
I think it kind of went like this.
Boise Cascade Wood products is not 100% self sufficient and it's veneer supply for AWP, but we have a very very high self sufficiency level, we do buy a little bit on the outside.
And I can tell you that whether it was in the southeast or the Pacific Northwest.
There was no and we will be needed to be bought.
Because we looked at every day.
If we could have we would have bought some more like.
I'm sure that is true.
So and there was and one particular case I'm thinking of in the southeast.
And third party veneer supply that supply to us as well as a number of other AWP and <unk>.
AWP and manufacturers had a significant.
Bye.
Which reduced the capacity by about one third.
Okay.
And that certainly impacted production a little bit.
But it was more than anything else as.
As you've noted I think and the and the.
The data.
And that there was a very strong push for us to produce more ROI joists. So we're very significant producer of I joists.
And our customer base was searching.
For I joists for I think pretty obvious reasons.
And obviously very good product.
Available.
And the ease of installation and the pricing for I joist, depending on where and what theories and what have you started to.
And it's still pretty much.
Quite similar to the cost of <unk>.
And so all those things lead to shifting our production to where our customers asked us to put it which was primarily and I joists.
And the other thing the other thing and I may add and to Mike's comment as a reminder, we have one small I joist facility that uses a solid sawn flange up and New Brunswick, Canada.
But the vast majority of our I joists are made without and LVL flange.
By increasing our I joist production and shipments.
We would typically use about a third of our LVL capacity.
For I Joist plan. So there was actually a fair amount of LVL that went out the door and just went out the door and the form of and I joist flange.
Got it okay, that's very helpful.
And and realizing that the long term goal is to prioritize veneer production into AWP I mean, just given the plywood pricing environment net present does that.
Shift.
The priorities and the near term at all or.
Maintaining those relationships on the AWP front, and making sure you have enough volume there.
Really the most important factoring and your view yes.
Yes.
We are focused on the AWP business.
Explain to a number of our customers.
Over the last month or so.
We are not putting.
Stretch rated veneer that we need to put into AWP into plywood.
We could make more money, making plywood.
Given the extraordinary prices that are being realized today.
But we don't do that because we the AWP business is when we build over a very long time, and it's a value added business and we're going to put every piece of stress right Neil we can and.
<unk> and AWP product.
Okay makes sense and just lastly, sticking with DWP could you remind us how you would typically think about incremental margins there and.
With some inflationary pressures do you expect your pricing initiatives can kind of fully offset those items here in 2021 or even be incremental.
And that margin front.
Well I guess I would answer it like this could widen.
<unk> spoke to al solid Seoul, and flange I joist facility in Canada.
I think it would be unlikely debt.
We could cover the increase and flange costs, and Canada and the cost of.
The wood the lumber that we use there has obviously gone through the roof. It's about twice what it used to be.
As it relates to the non Canadian production, because waiting and highly self sufficient.
We do have some impact from things like I wish <unk> web stock.
And.
And as I mentioned earlier I think when I was responding to a question maybe from Reuben.
It really depend on what's happening and the market in terms of demand and supply as to whether we can find.
Appointing time to realize any increase in price.
I wouldn't like to.
Should make any comment about whether that would be more or less relative to the change and now input costs.
Okay, Alright, I appreciate the color, Mike and congratulations Nick.
Thank you Kurt Thanks.
Thanks for.
We have our next question coming from the line of Paul Quinn with RBC capital. Your line is open.
Yes, thanks and.
For letting me have a couple of questions. One results are pretty good and pretty surprised by the market reaction, but I had a couple higher level questions for you just on the mass timber side, how do you.
See debt growth going forward and how would you like to participate in that growth.
So Paul this and Wayne.
I think one of the key things for US is to try to repurpose veneer into higher and better uses so mass timber panels columns et cetera out of veneer.
We will be we hope and important part of the mix and we're doing a lot of work on product innovation and qualification with API.
The other thing is looking at the mass timber market to other products that seem to be getting.
A large amount of traction our glue Lam beams, we have a small plant today and.
And Homedale, Idaho, and there may be.
Opportunities for continued growth and glue Lam and then the other product that seems to be getting pretty good traction and the market is cross laminated timber which.
Which is the lumber based product.
And so those would be other potential areas, where we could either grow organically or potentially through acquisition, but again I think we're going to see a suite of products and services.
Probably not dissimilar to what we've done on AWP for single family residential construction, there is a pretty good market opportunity, but it may require products beyond what we currently do that for many of our base.
Okay.
Helpful. And then if you could assess your overall impact of Covid on on wood production.
And.
In 2020 was debt, which had a material hit.
If you look at the numbers, Paul and if you're.
Look at the amount of LVL and I joists tool for that net of plywood sales volumes year over year.
They're not dramatically different to be honest.
Okay. So.
Did COVID-19 or Covid, having an impact it is I think the impact is.
And to summarize sort of like this one avail senior manufacturing manages states and is being.
We have like 80% of the people working 100, 120% of the normal al has to make up the difference.
It's not quite that bad now.
Things have improved.
But certainly in the latter part of last year after the holidays around Thanksgiving Christmas and what have you.
We had a tremendous tremendous shortage of people.
And it has improved coming into the first part of this year.
And so.
Today, we're not at full.
Staffing for full production.
But we certainly and a much better position than we were let's say in the latter part of last year.
And I'm hopeful that as we move and move.
Move through this year with the <unk>.
Vaccines and warmer weather and what have you will see a little bit more relief and things will get somewhat back to what you might call normal.
Excellent great context, thanks, guys, that's all and thank.
Thank you okay. Thanks, Paul.
We have a follow up question coming from the line of George Staphos with Bank of America. Your line is open.
Hi, guys. Thanks for taking the follow on.
Couple here. So I know there is no single answer for a number for this question, but if you were running normally and you had normal staffing to.
For the earlier questions. What do you think you could perhaps crank out Additionally, relative to where you are right now both on plywood, recognizing you're not really trying to push volume through plywood and on AWP.
Yes George.
Maybe I'll answer this in two parts.
So we would produce.
Some more veneer internally clearly if we had full staffing and <unk>.
We produced a little bit more ammonia and by a little bit.
Round numbers, maybe 5% Jose.
Maybe a bit more than that.
But the issue becomes fully.
AWP side of the business.
Full staffing and available and machine center time as debt.
I think part of what the industry in general is experiencing is that not all veneer and is capable of being put into engineered wood products.
And so that particular type of many and that we closed stress right and veneer is sort of.
Particularly at the moment.
And at a premium.
And I think part of it could be.
This 100% for sure.
That with the very high plywood prices, some third party veneer slashed.
Slash plywood producers.
And make more money, putting veneer and plywood relative to sales selling distressed right had been here two and AWP producer.
So we really and I think this is true based on commentary of hotels, where the industry is looking for more stretched right and veneer to increase AWP production.
Does that help.
It does.
And I recognize that there are a lot of constraints in terms of the.
The operating model and what it means to answering that question, Mike I wanted to go back and you probably answered a couple of times and I, just don't recall, but at one point and time.
During the IPO I remember Boise, saying that really wanted to be more than self sufficient on veneer correct me, if I'm wrong and that recollection, but I remember you, saying that not you, but the company's view being that there would be shortages of and year at some point.
And you wanted to be and are positioned to capitalize on that both in terms of your products and and kept the capacity.
That is a correct assessment has that view changed at all and if it's incorrect and remind me that were incorrect and a recollection here, but how does that view on veneer evolved over the last seven eight years.
No I think it's a pretty good question George so.
For the last decade or thereabouts.
Dean and making strategic investments to increase the total amount of veneer, we produce and the amount that can be put into engineered wood products.
So we spent many tens of millions of dollars, mostly but not exclusively in the southeast and United States.
Installing new dryers, veneer, dryers or replacing old dry ash with more efficient new dryers.
So.
We can produce moving here.
And historically, we were able to.
At the same time.
We've made acquisitions and for example, the OSB AWP facility has its own veneer production capacity. So it's essentially self sufficient.
And we made acquisitions and places like chest to bring on more veneer into the system. So over the last decade, or so we've actually increased our footprint driving directly towards the stated objective that you mentioned, which I'm guessing either Tom Corrick will come Carlo mentioned at the time.
So we are certainly on that particular event.
There have been some other changes of course over that period of time.
We used to have and operation approximately 10 years ago, and Brazil, which we don't have any longer and we were bringing veneer from Brazil.
And we.
We used to buy considerable amount of veneer on the outside and we don't buy as much these days, because many suppliers and diversified and and selling to a variety of different manufacturers' AWP manufacturers.
We can produce as authority said, a little bit more of a linear we have some more dry work, but any a little bit more that we can do.
And thats going to be sort of I think the lynchpin as I mentioned earlier when I was answering I think pauls question.
And as to how much more title AWP can be produced Duane I might finish up right.
Touching on what Hawaii, and spike and that with mass timber.
They're awesome how about.
Avenues that we're looking at.
To try and find ways and means of putting veneer today, and thats not going into AWP into a type of Alcoa.
I'll call it engineered wood product.
Panel.
And that might give us some flexibility to hopefully supply some some more volume down debt.
Down the road a little bit.
Thanks, Mike.
My last question and my guess is there's not that much if any effect from this but.
<unk> question earlier kind of triggered the question from my Vantage point and Theres been a lot of capacity added by the Latin American companies.
Both locally and their markets, but also in North America.
In.
Non structural wood panel, so particleboard and medium density fiberboard does that have any effect at all and.
And any of your markets I wouldn't expect again and it would be a big deal, but I figured I would ask the question. Thanks, guys and good luck and a quarter.
Hey, George it's Nate.
And in terms of that debt and.
And for that capacity it really doesn't have any any effect on us either the wood products or BMD side. So.
And while to your point that that has been.
A growing theme really doesn't have any any connection to Boise cascade and either division. Okay. Thank you so much Nate.
Great. Thanks for thanks.
There are no further question at this time I will turn the call back over to Wayne Wang Craig.
Thank you everyone for joining us this morning, and we look forward to catching up with you after first quarter have a great week.
This concludes today's conference call you may now disconnect.
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