Good morning. My name is Elaine, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Boise Cascade's Fourth Quarter 2020 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. 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 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 differ from the results anticipated, please refer to Boise Cascade's recent filings with the SEC. It is now my pleasure to introduce you to Wayne Rancourt, Executive Vice President, CFO and Treasurer, Boise Cascade. Mr. Rancourt, you may now begin your conference.

Thank you, Elaine. 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 Jeff Strom, the Incoming Head of our Building Materials Distribution Operations. Nick has announced his retirement from March of this year. Turning to Slide 2, I would point out the information regarding our forward-looking statement. The appendix of the presentation includes reconciliations from our GAAP net income to EBITDA and adjusted EBITDA as well as segment income to segment EBITDA. And with that, I will turn the call over to Nate.

Thanks, Wayne. Good morning, everyone. Thank you for joining us on our earnings call today. I'm on Slide number 3. Our fourth quarter sales of $1.5 billion are up 34% from fourth quarter 2019. Our net income was $26 million or $0.66 per share compared to net income of $14.6 million or $0.37 per share in the year-ago quarter. Fourth quarter 2020 results include a non-cash pension settlement charge of $6.2 million or $0.12 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 or $0.98 per share related to the release of stranded tax effects upon elimination of our qualified defined benefit pension plan. In the fourth quarter of 2020, total US housing starts increased 12% compared to the same period last year. Single-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 end 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 in the fourth quarter compared to $8.1 million in the year-ago quarter. Wood Products continued its focus on establishing pre-COVID-19 manufacturing production levels in response to strong end product demand, particularly for our EWP business during the fourth quarter. Our Building Materials Distribution business reported segment income of $67.1 million and sales of $1.3 billion for the fourth quarter, compared to $26.3 million of segment income and sales of $1 billion in the comparative prior year quarter. BMD sales and income were strong and our long-term strategy and commitment to consistently carry a broad base of in-stock products supported by high service levels, at a solid financial position continues to deliver value to our vendor and customer partners in 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. Wayne?

Thank you, Nate. I'm on Slide 4. Wood Products sales in the fourth quarter, including sales to our distribution segment were $358.7 million compared to $296.3 million in the fourth quarter of 2019. As Nate mentioned, Wood Products reported segment income of $40.8 million in the fourth quarter compared to $8.1 million in the prior year quarter. Reported EBITDA for the business was $54.5 million, up from EBITDA of $22.7 million reported in the year-ago quarter. The increase in 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 EWP. BMD sales in the quarter were $1.3 billion, up 35% from fourth quarter 2019. Sales prices and sales volumes increased 26% and 9%, respectively. The business reported segment income of $67.1 million or EBITDA of $72.9 million in the fourth quarter. This compares to segment income of $26.3 million and EBITDA of $31.6 million in the prior year quarter. The increase in 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 sales in general line products and EWP compared with the fourth quarter of 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 in the tables of our earnings release. The net of those items was negative $14.3 million in the fourth quarter of 2020 compared with $9 million in the fourth quarter of 2019. The increase was due to a non-cash pension settlement charge of $6.2 million in the fourth quarter of 2020 related to the elimination of our pension plan. Turning to Slide 5, our fourth quarter sales volumes for I-joists were up 27%, while sales volumes for our LVL were down 2% compared with the fourth quarter of 2019. Demand for EWP continues to be strong as we move into 2021, fueled by increased housing starts and a higher proportion of single-family starts. Pricing in the fourth quarter for I-joists and LVL were down 2% and 1%, respectively compared with the third quarter of 2020 due to temporary price protection arrangements. Wood Products announced multiple list price increases for both LVL and I-joists in 2020. We expect to see the benefit of the list price increases phase in over the next several quarters. Turning to Slide 6. Our fourth quarter Plywood sales volume in Wood Products was 305 million feet compared to 315 million feet in the fourth quarter of 2019. A lower volume from Plywood sales reflects our continued work to optimize veneer into EWP production as well as periodic short-term disruptions related to COVID-19. The average Plywood net sales price in the fourth quarter was $407, up 62% from the fourth quarter of 2019. Plywood pricing in October and November 2020 fell sharply due to improvements in industry Plywood production effectiveness, increased imports and shorter lead times for orders, particularly in the southern US. However, Plywood pricing rebounded in December 2020 and has continued to increase and remain at elevated levels in early 2021. Moving to Slide 7, BMD's fourth quarter sales were $1.3 billion, up 35% from fourth quarter 2019 with prices up 26% and volumes up 9%. By product area, BMD's commodity sales increased 62%, general line product sales increased 16% and EWP sales increased 15%. Gross margin dollars generated improved by $45.4 million in the fourth quarter compared with the same quarter last year. The gross margin percentage for BMD was 13%, consistent with the fourth quarter of 2019. The fourth quarter of 2020 gross margins decreased from the third quarter of 2020 due to the sharp decline in commodity Wood Products prices during the first two months of the quarter. BMD's EBITDA margin was 5.5% for the quarter, up from the 3.2% reported in the year-ago quarter, primarily due to improved leveraging of selling and distribution costs. Slide 8 shows the sharp rise in lumber pricing in the second and third quarters of 2020. In the fourth quarter of 2020, lumber pricing fell sharply during October and November before a strong pricing rebound in December. Strong demand when coupled with capacity constraints created supply-demand imbalances in the marketplace, resulting in historically high pricing levels for commodity lumber and panel products. Pricing movements from the current levels in 2021 will likely be determined by the strength of end market consumption and industry operating rates. On Slide 9, 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 worked towards restoring their production to near pre-COVID levels. Imports increased and customer orders were able to be filled in 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 in early 2021. 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 end product demand and a slight improvement in the supply chain. Consistent with our historical patterns, we expect working capital increases to use cash in the first quarter of 2021. The statistical information filed as Exhibit 99.2 to our 8-K has the receivables, inventory, and accounts payable data broken down by segment for those that are interested in the detail. I'm now on Slide 11. We finished the fourth quarter with $405 million of 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 in transferring the remaining liabilities to Prudential Insurance. We recorded the non-cash settlement charge of $6.2 million in conjunction with the transactions. 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 the fourth quarter of 2020 with the pension plan 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. This level of capital expenditures could increase or decrease as a result of a number of factors, including acquisitions, efforts to accelerate organic growth, exercise of lease purchase options or financial results, future economic conditions, and timing of equipment purchases. I'm pleased to note that we returned $79 million in 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 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 levels of economic uncertainty given the pandemic, low mortgage rates, and the continuation of work-from-home practices by many in the economy, demographics in the US have created a favorable demand environment for new residential construction, which we expect to continue in 2021. Furthermore, with many homeowners spending more time at home, repair remodel spending may remain elevated as homeowners invest in their existing homes. The February Blue Chip Consensus for US housing starts is 1.51 million for 2021. Although we believe the current US demographics support the higher level of forecasted housing starts and many national homebuilders are reporting strong near-term backlogs, the impacts of COVID-19 on residential construction and repair and remodeling activity are uncertain. Aside from higher OSB input costs in I-joists, we continue to see favorable cost improvements and efficiencies in our manufacturing operations. Wood Products continues to make an effort to restore production rates to pre-COVID-19 levels in response to strong end product demand, particularly for our EWP business. There is continued focus on innovation to reduce our costs, as well as establishing products and services to address market opportunities in the commercial use of mass timber. As previously announced, we have reproduced 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 permit levels. With the recent winter weather over the last week, we have experienced production losses in 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. In 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 at the forefront of our distribution group in 2021. Strong demand when coupled with capacity constraints has created supply and demand imbalances in the marketplace, and it has resulted in higher-than-normal pricing levels for commodity lumber and panel products. As a wholesale distributor of a broad mix of commodity products and a manufacturer of certain commodity products, our sales and profitability are influenced by changes in commodity product prices. With uncertainties in demand and difficulties in judging the appropriate operating rates, commodity wood products pricing could be volatile in the months ahead, and we will react appropriately. As we wrap up our formal comments, I would like to express my appreciation for the focus of our associates and managers who have maintained on safety, taking care of one another and the communities in which we operate, as well as our customers and other key relationships. Their performance during the pandemic as well as last year's hurricanes in Louisiana, the wildfires in the West Pacific have been inspiring. We will continue to be guided by our values of safety, integrity, respect, and pursuit of excellence. We will successfully get to the other side of this 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. The impact Nick has made on BMD and the company is clear. The BMD culture reflects his passion, commitment, and drive for excellence. His energy, experience, and relevance along with his wit and many unique expressions will certainly be missed in Boise Cascade. Nick has set a very high standard for our organization. And I have full confidence in Jeff building on the success and momentum in BMD. We move forward with great clarity on what has made BMD successful and we will maintain that discipline and focused approach as we move forward as a team. Nick, all the best to you 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. We have our first question coming in from the line of George Staphos with Bank of America. Your line is open.

Thanks. Hi, everyone. Good morning. Nick, congratulations to you. Thanks for everything. And Jeff, we look forward to working with you as well. Congratulations on the performance this year as well 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 significant, but there was a bit more decline in pricing in I-joists in the fourth quarter versus what we were seeing in the prior quarters and also versus LVL, what was causing it? 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 time, you numerated all the normal target. Can you talk us about how you see acquisitions evolving for Boise over time? Would you be interested in, you know, perhaps being opportunistic in Wood Products that are something attractive and attractively priced? Or is it really going to be more about growing BMD out? Thanks, guys. I'll turn it over.

George, it's Mike. How are you doing?

Mike, good morning to you.

Yeah, you too. Yeah, so, the whole issue around the price declines that you're referring to. I think Wayne may have made some commentary actually last quarter around this. But you know, last year was sort of a year of a couple of different stories. Earlier in the year, when we thought, you know demand was falling off dramatically, we went out into the marketplace to sort of shore up the situation. And as a result of doing that, you know, we were, we put in place some programs to ensure the demand would be there later in the year. As it turned out, the world sort of changed on us somewhat. And, of course, the demand later in the third and fourth quarter particularly took off. As it relates to the differential decline you know, we have some price protection plans in place that allow the dealers to forecast to the builders what they expect that next quarter's pricing will be for the products. As a result of that, you know, we mix those two things together, and you end up with a situation where, you know, at the end of the year, our pricing was down relative to what most people had originally anticipated it should be. And we expect to see obviously going forward some modest increase in the coming quarters as the price protection falls off and the price increases start to take effect. It wasn't anything particularly significant that made the I-joists' number a little bit different to the LVL number; it's just the, you know, the combination of obviously, I-joists' demand was up quite significantly relative to the prior quarters and also relative to LVL.

To some degree I guess it was a high-quality problem, right. The more volume you had, you exacerbated the prior -

Yes, yes.

Should we just, if I can then inject 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 you know, qualitatively, what would you expect?

Yeah, I think we'll see some modest improvement in each of the quarters as we go through the year. I wouldn't expect that all come at once, because it never does with our price protection programs. And I think Wayne 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 EWP product lines.

Yeah.

Well, if you look at a 2% sequential increase in pricing from 4Q to 1Q, George, it would still leave us slightly below the Q1 2020 number. So it will probably be somewhere close to flat. But I wouldn't expect big improvements relative to Q1 of 2020.

Understood.

And then, George -

Yes, go ahead.

Yeah, sorry, George, it's Nate. Yeah, just to take your question on acquisitions over time and how we're thinking about that. I think you know we're committed to growth really in both businesses. Starting with BMD, we continue to look at expansion of our footprint within our current locations in terms of products and services, some geographic opportunities as well as continue to grow our mill works, specifically our door segment. And we've announced a couple of those, our Houston which was our most recent. So that will continue to be an important part of our path forward relative to BMD. And I think for Wood Products, we'll continue to focus on innovation in terms of the work that we're doing in our facilities, but the opportunities that I had mentioned around mass timber, we think that that's an important opportunity for our company in our industry. We would see investments in that area moving forward as an organization. So I guess I would just kind of summarize it 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.

If I could just ask one last thing, and I'll - I'm double-dipping here. Would you therefore, Nate, ever going to rule out anything? But would that tend to deemphasize growing via acquisition and would in areas that you're already in since it seems like you're trying to, as you mentioned, leverage innovation and mass timber as being one example of that? Or is that to find a point and can't rule out anything?

Yeah, I think, thanks, George. Probably a little too fine a point. I mean, I don't think we'll rule out anything, obviously, you know, our commitment is to continue to supply our customers with a range of framing materials, products and services that they expect from Boise Cascade. So I wouldn't probably get it to find a point on that. But in terms of some of the things that we're, you know, kind of leading into specific to Wood Products, it would be, you know, certainly mass timber and that opportunity is something that we think is going to be important moving forward.

Thank you very much, Nate. I'll turn it over.

Thanks, George.

We have our next question coming from the line of Mark Wilde with Bank of Montreal. Your line is open.

Good morning, guys. I'm looking at your stock price, thinking no good deed goes unpunished. Anyway, I guess to start, I'm just curious with these prices for both panels and lumber up in nosebleed territory, are you seeing any signs of either, you know, material substitution or conservation by builders in response to the higher prices? I know, you know, going back 15 years ago, there was a lot of talk about steel studs, and I don't know whether any kind of like commercial people will toggle back and forth between kind of metal and wood, whether you're actually seeing builders' pullback activity at all?

Hey, Mark it's Nate. You know, in terms of substitution, we haven't really seen anything, you know, material in terms of product substitution. I think most products and services kind of tethered to housing, specifically single-family is really tensioned up. So in terms of excess capacity, anywhere, we just really aren't seeing it across, again, many of the different items that we recover and carry. In terms of, you know, people pulling back, maybe some early signals, you know, where someone has project flexibility in terms of timing. You know, I think given to your point, these significant costs that we're seeing on commodities, I think there's perhaps a little bit of hesitation building in 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, you know, in a very quick order. So, no material substitution that we're seeing, and maybe some signs early on kind of 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, they're perhaps looking to do that.

Okay. And, Nate is that also possible to talk about through your distribution, what you're seeing in the way of kind of increased imports of lumber and panels? I mean, there have been some articles about both in the trade press recently?

Nick, you want to walk that question through?

Good morning, Mark. I'll let Nate or I'm sorry, I'll let Mike chime in on plywood. I think he's closer to that in terms of some of those dynamics. From the distribution standpoint on the commodity Wood side, you know, the Europeans have always had a bit of a presence. And this is anecdotal at best, but it seems like there's more wood available just given the pricing opportunities that some of those offshore guys might have.

Yeah, maybe I can just give - yeah, maybe, Mark on Brazil, the last numbers I have are from January. And they brought in just under 67,000 cubic meters in January. Then if you go back to summer of 2020, at the high point, they exported 148,000 to the US. And the January number was actually below December. And that's fairly typical early in the year; they'll direct to Europe a lot of that volume before the tariffs go on. And then we typically see a shift back to the US market in April-May timeframe.

Okay, all right. That's helpful. And then, yeah, Mike in the panel market?

Yeah. So here's a couple of pieces of anecdotal information. I was told yesterday by somebody that the United Kingdom is sort of hanging out a carrot to the European lumber businesses. And that sort of went like this, whatever the United States will pay you to send it there, we'll pay you $100 more to send it to the UK. So that sort of gives you some flavor of the type of market that we're experiencing. So obviously, Wood Products, Boise Cascade's Wood Products is not in the lumber importing business. But that sort of gives you some flavor of the challenges that are presenting themselves in the lumber side of things. To Wayne's good points about Brazil, you know, the volume from Brazil last year was up like 28% year-over-year. So quite a significant amount, about 215,000 cubic meters more plywood. And yes, this year has done a lot for a good lick. So the 67,000 cubes that Wayne spoke of, that's twice as much as was imported in January of 2020. So it's not that Brazil is not sending a lot of plywood because they are. And it's still not enough. I mean, to your point, we have prices that are now in the nosebleed territory. So it'll be interesting to see whether the volume continues to climb as it did last year. I can't see any good reason why it wouldn't.

Okay. And then, Wayne, just a couple of quick ones for you. Can you just remind us of sort of, you know, where you would want to kind of target leverage? I mean, you're virtually net debt free at the end of the fourth quarter; you did mention working capital as using cash in the first quarter, but just help us think a little bit about kind of going forward. And then also just to maybe remind people a little bit of what to do to kind of manage downside risk from commodity prices at these levels?

Yeah. So on the cash position. Normally, you know, pre-pandemic, we would have said gross debt to EBITDA somewhere around 2.5 and enough cash to take the net leverage into the high 1s close to 2. And we're maintaining higher cash balances for really sweep insurance given the uncertainties around COVID and some of the growth initiatives that Nate referred to.

Okay, and then just the kind of commodity - just managing the commodity risk.

Yeah, I think the thing that we would typically do is shorten up our orders in BMD and try to be very tightly matched in terms of what we're buying and what we're selling. And, you know, this is directional as opposed to absolute. But if we, at a normal commodity environment might have three to four weeks' worth of wood, if we feel like it's getting toppy, we 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 in commodities to really be efficient on the logistic side, which is why we keep somewhere around 43%-ish of our sales in the commodity Wood Products as we think it gives us a real advantage on filling 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, November, which is part of why the fourth quarter results were as strong as they were. I realized we had a pricing recover in December. But they stayed out of the way on a lot of the damage that would normally occur on a sharp selloff. So hopefully, we'll be able to do the same thing in 2021.

Okay, that's really helpful. Thanks, guys. I'll turn it over.

Thanks, Mark.

Our next question coming from the line of Reuben Garner with The Benchmark. Your line is open.

Good morning, everybody. Maybe starting on the BMD side, if I'm looking at it the right way, you know, the second and fourth quarters, you know, the pricing environment was kind of, I guess, neutral to some extent, maybe correct me if I'm wrong, but your EBITDA margins in those quarters were kind of in the 4.5% to 5.5% range. Is that kind of a new level in the BMD business? Or were there other benefits or maybe I'm thinking about the commodity part wrong and you had some benefits on the commodity front? Just talk to us about, you know, those were, I think well above where your previous targets were from an EBITDA margin standpoint for the BMD division?

Yeah, Reuben, this is Wayne and I'll - Nick can comment after me if he wants to add anything. I would tell you, normally, we would think of somewhere around 3.5% as an EBITDA margin in BMD that may creep up as we continue to grow general line and some of the things we're doing in the door business that carries more investment. But usually, we're in the mid-to-high 11s 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 would be, you know, somewhere in the 8s to get you to kind of that 3.5% number. And obviously, we're trying to move that number up. But I don't think we're, you know, creeping to a 5% EBITDA margin as a normal state of affairs that is really reflective of the additional leverage we got on expenses because of the exceptional margins we had on commodity products in 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 to your gross margin? Assuming that there is some rollover - or volatility in the commodity prices in the coming, you know, 12 months to 24 months?

Hi, Reuben, this is Nick. We have selected programs with selected suppliers with selected products. It's not a large chunk of what we do. But certainly if we get an environment where we anticipate pretty severe pricing decline in the commodity arena, we'll engage in conversations with suppliers to mitigate the risk associated with that, and that can take many forms. But it's not a big part of what we do now.

Okay. And then last one I'll sneak in. So can you talk about the capacity utilization in EWP for the industry? I guess the impetus of 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, you know, across the, you know, housing industry and the kind of growth rates you just saw in the fourth quarter and given how high really everything in Building Products is pricing seems to be up in just about every category on a year-over-year basis. Is it likely that we're going to see more price increases as we move through '21 in EWP? Or is there something else going on that would limit it?

Yeah, hi, Reuben it's Mike. I guess I'll try to answer this by component. So I think generally speaking, the industry is trying to produce as much EWP as it possibly can. I can certainly state that as a fact for Boise Cascade. And, of course, there have been many impacting variables, you know, in the last, let's say, six months to nine months, of course, COVID being one of them and then other natural disasters, you know, wildfires in the West and hurricanes in the south, and to some degree, some downtime at some producers due to other issues. But I, you know, as time goes on, I think the industry has some incremental, but not a huge amount of incremental supply that they can bring online. As it relates to the pricing power question, you know, this industry in general tends to have a more long-term focus; it's not really a commodity pricing model that we used in EWP. So as a result of that, the variations in price either up or down, just don't tend to follow, you know, the usual commodity be it, you know, lumber or plywood variations. So, will prices go up in the future? Well, your 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, then I guess the law of economics would suggest that there is some opportunity for some incremental price increase in the future. But there are many, many contractual-related issues that would have to be worked through with most of the EWP manufacturers. It's just not as easy as walking out and implementing a price increase tomorrow and seeing it fall straight to the bottom line. It's really just nothing like the commodity side of the business.

Thanks for that, Mike. I appreciate the answer and congrats on the close to 2020 guys. Good luck to the - in the rest of this year.

Thanks, Reuben.

Thanks, Reuben.

Thanks, Reuben.

And 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, Kurt.

Good morning, Kurt.

Good morning. I just wanted to start off on BMD gross margins and just given the persistent inflationary trend here in Q1. I mean, do you think gross margins there could kind of approximate the high watermark set in the third quarter of '20? Are there any big offsetting factors we should be aware of?

Hi, Kurt, this is Nick. So the third quarter, I'll take them in reverse order there. The third quarter we saw, as you can see from the charts in the packet this morning, pretty spectacular increases in composite pricing both on the panel and the lumber side. Having the expectation that dynamic from here going forward, we don't think we'll get 40%, 50% price volatility increases from where we're sitting today. You know, as we've talked before, our gross margin is a function of the trajectory of price on commodities, even more than the absolute level of price. And the mix between general line and EWP and commodities, and I think Wayne's historical guidance is probably appropriate and normalized and what he talked about a few minutes ago, but I don't think you're going to get 40%, 50% price increases from where we're sitting today.

Okay, all right, thanks for that, Nick. And just on the LVL volumes in the quarter being down year-over-year. Was your ability to produce the veneer or I guess source a veneer from a third-party a real constraint and that kind of relative to the growth that you saw in I-joists?

Yeah, Kurt. Hi, it's Mike. I think it kind of went like this. Boise Cascade Wood Products is not 100% self-sufficient in its veneer supply for EWP. 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 more veneer to be bought because we looked everywhere. If we could have, we would have bought some more like it. I'm sure that is true. So and it was in one particular case I'm thinking of in the southeast, a third-party veneer supplier that supplies to us as well as a number of other EWP manufacturers had a significant buyer that reduced their capacity by about one-third. So that certainly impacted production a little bit. But it was more than anything else as you've noted on, I think in the data, that there was a very strong push for us to produce more I-joists. So we're a very significant producer of I-joists. And our customer base was searching for I-joists for, I think, pretty obvious reasons, you know, obviously a very good product available, and the ease of installation and the pricing for I-joists, depending on where and what theories and what have you started to, I mean, it's still pretty much quite similar to the cost of 2 by 10s. And so all those things led to shifting our production to where our customers asked us to put it, which was primarily in I-joists.

Yeah, the other thing I may add to Mike's comment is, as a reminder, we have one small I-joists facility that uses a solid sawn flange up in New Brunswick, Canada. But the vast majority of our I-joists are made with an LVL flange. So by increasing our I-joists production and shipments, we would typically use about a third of our LVL capacity for I-joists flange. So there was actually a fair amount of LVL that went out the door; it just went out the door in the form of an I-joist flange.

Got it. Okay, that's very helpful. And realizing that the long-term goal is, you know, to prioritize the veneer production in the EWP. I mean, just given the Plywood pricing environment at present, does that, you know, shift the priorities in the near-term at all? Or you know, is maintaining those relationships on the EWP front and making sure you have enough volume there really the most important factor in your view?

Yeah, now, we are focused on the EWP business. As I've explained to a number of our customers over the last month or so, we are not putting stress-rated veneer that we need to put into EWP 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 the EWP business is one we build over a very long time and it's a value-added business and we're going to put every last piece of stress-rated veneer we can into an EWP product.

Okay, makes sense. And just lastly, sticking with EWP, could you remind us how you typically think about incremental margins there? And, you know, obviously, with some inflationary pressures, you know, do you expect your pricing initiatives can kind of fully offset those items here in 2021 or even be incremental on that margin front?

Well, I guess I'd answer it like this, Kurt. You know, Wayne spoke to our solid sawn flange I-joist facility in Canada; I think it would be unlikely that we could cover the increase in flange costs in Canada, 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 we're highly self-sufficient. It's not - we do have some impact from things like OSB Web Stock. And as I mentioned earlier, I think when I was responding to, you know, a question maybe from Reuben, it really depends on what's happening in the market in terms of demand and supply as to whether we can find a point in time to realize any increase in price. I wouldn't like to make any comment about whether that would be more or less relative to the change in our input costs.

Okay, all right. Appreciate the color, Mike and congratulations, Nick.

Thanks, Kurt.

Thanks, Kurt.

We have a follow-up question coming from the line of Paul Quinn with RBC Capital. Your line is open.

Yeah, thanks and thanks for letting me have a couple of questions. One is, results pretty good. I'm 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, you know see that growth going forward? And how would you like to participate in that growth?

So Paul, this is 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, etc. out of veneer will be, we hope, an important part of the mix and we're doing a lot of work on product innovation and qualification with APA. The other thing is, looking at the mass timber market to the products that seem to be getting a large amount of traction are glulam beams. We have a small plant today in Homedale, Idaho, and there may be opportunities for continued growth in glulam. And then the other product that seems to be getting pretty good traction in the market is cross-laminated timber, which is a 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 EWP for single-family residential construction. There's a pretty good market opportunity, but it may require products beyond what we currently do have a veneer base.

Okay, that's helpful. And then if you could assess your overall impact of COVID on wood production, you know, in 2020, was that a material hit?

If you look at the numbers, Paul, and if you look at the amount of LVL or I-joists so for that matter, plywood sales volumes year-over-year, they're not dramatically different to be honest.

Yeah.

Okay. So did COVID or is COVID having an impact? It is. I think that the impact is kind of summarized sort of like this: one of our senior manufacturing managers states that as being, we have like 80% of the people working 120% of their normal hours to make up the difference. It's not quite that bad now. Things have improved. But certainly in the latter part of last year, you know, after the holidays around Thanksgiving, Christmas, and what have you, we had a tremendous shortage of people. It has improved, you know, coming into the first part of this year. And so, you know, today, we're not at full staffing or full production. But we're certainly in 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 in, you know move through this year with the vaccines and the warmer weather, and what have you, we'll see a little bit more relief and you know things will get somewhat back to what you might call normal.

Excellent, great context. Thanks, guys. That's all I have.

Thank you.

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. I had a couple here. So I know there's no single answer or number for this question. But if you were running normally and you had normal staffing to, you know, the earlier question, 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 EWP?

Yeah, okay, George. So maybe I'll answer this in two parts. So we would produce some more veneer internally. Clearly, if we had full staffing, then we'd produce a little bit more veneer and buy a little bit; round numbers may be 5% or so. Maybe a bit more than that. But the issue becomes for the EWP side of the business, full staffing and available machines at a time is there. I think part of what the industry in general is experiencing is that, not all veneer is capable of being put into engineered wood products. And so that particular type of veneer that we call stress-rated veneer is sort of, particularly at the moment at a premium. And I think part of it could be, I don't know this 100% for sure, that with the very high plywood prices, some third-party veneer/plywood producers can make more money putting veneer into plywood relative to selling the stress-rated veneer to an EWP producer.

It does? And I recognize there are a lot of constraints in terms of the operating model and what it means to answering that question. You know, Mike, I want to go back and you've probably answered this a couple of times. And I just don't recall, but at one point in time, you know during the IPO I remember Boise saying that it really wanted to be more than self-sufficient on veneer. Correct me if I'm wrong in that recollection, but I remember you saying that, not you, but the company is saying that there would be shortages of veneer at some point and you want to be in a position to capitalize on that both in terms of your products and on capacity. If that is a correct assessment, has that view changed at all? And if it's incorrect, then, you know, remind me that we were incorrect in our recollection here, but you know, how's that view on veneer evolved over the last, you know, seven, eight years?

Yeah, you know I think it's a pretty good question, George. So for the last decade or thereabouts, we've been 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've spent many tens of millions of dollars, mostly, but not exclusively in the southeastern United States, either installing new dryers, veneer dryers or replacing old dryers with more efficient new dryers. So we can produce more veneer than, you know, historically, we're able to. At the same time, we made acquisitions, for example, the fullest EWP facility has its own veneer production capacity. So it's essentially self-sufficient. And we made acquisitions at places like Chester to bring on more veneer into the system. So over the last decade or so we've actually increased our footprint driving directly towards, you know, the state of objective that you mentioned, which I'm guessing either Tom Corrick or Tom Carlile 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, you know, we used to have an operation approximately 10 years ago in Brazil, which we don't have any longer and we were bringing veneer from Brazil. And we used to buy considerable amount of veneer on the outside. And we don't buy as much these days, because veneer suppliers are diversified and selling to a variety of different manufacturers, EWP manufacturers. I think we can produce, as I thought you said, a little bit more veneer. We have some more dryer work, but only a little bit more that we can do. And that's going to be sort of, I think, the linchpin, as I mentioned earlier, when I was answering, I think Paul's question, as to how much more total EWP can be produced. To Wayne's - I might finish off by touching on what Wayne spoke about with mass timber. You know, there are some other avenues that we're looking at to try and find ways and means of putting veneer today that's not going into EWP into a type of engineered wood product panel. And that may give us some flexibility to hopefully supply some more volume 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 you know, Mark's question earlier kind of triggered the question from my vantage point. You know, there's been a lot of capacity added by the Latin American companies, both locally in their markets, but also in North America in non-structural wood panel, so particle board, medium density fiberboard. Does that have any effect at all in any of your markets? I wouldn't expect again that would be a big deal. But figured I would ask the question. Thanks, guys and good luck in a quarter.

Hey, George it's Nate. Yeah, just in terms of that MDF of that capacity kind of really doesn't have any effect on us, either in the Wood Products or BMD side. So, you know, while to your point that has been a growing theme really doesn't have any connection to Boise Cascade in either division.

Okay. Thank you so much, Nate. Good luck -

Okay. Thanks, George.

Thanks.

This concludes today's conference call. You may now disconnect.