Earnings Call Transcript - BCC Q1 2021

Operator, Operator

Good morning. My name is Jeff and I'll be your conference facilitator today. At this time, I would like to welcome everyone to Boise Cascade's First Quarter 2021 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. Questions will be taken in the order they are received. Before we begin, I remind you that this call may contain forward-looking statements about the company's future business prospects and anticipated financial performance. These statements are not guarantees of future performance and the company undertakes no duty to update them. Although these statements reflect management's expectations today, they are subject to a number of business risks and uncertainties. Actual results may differ materially from those expressed or implied in this call. For a discussion of the factors that may cause actual results to differ from the results anticipated, please refer to Boise Cascade's recent filings with the SEC. It is now my pleasure to introduce Kelly Hibbs, Incoming Senior Vice President, CFO, and Treasurer of Boise Cascade. Mr. Hibbs, you may begin your conference.

Kelly Hibbs, CFO

Thank you, Jeff. Good morning, everyone. I'd like to welcome you to Boise Cascade's first quarter 2021 earnings call and business update. Joining me on today's call are Nate Jorgensen, our CEO; Mike Brown, Head of our Wood Products Operations; Jeff Strom, Head of our Building Materials Distribution Operations; and Wayne Rancourt, our CFO, who will be retiring a week from today after nearly 36 years of outstanding service to Boise Cascade. Turning to slide 2, I would point out the information regarding our forward-looking statements. The appendix includes reconciliations from our GAAP net income to EBITDA and adjusted EBITDA and segment income to segment EBITDA. I will now turn the call over to Nate.

Nate Jorgensen, CEO

Thanks, Kelly. Good morning, everyone. Thank you for joining us for our earnings call today. I'm on Slide number 3. Our first quarter sales of $1.8 billion were up 56% from the first quarter of 2020. Our net income was $149.2 million or $3.76 per share compared to net income of $12.2 million or $0.31 per share in the year-ago quarter. First quarter 2020 results included $50 million of pretax accelerated depreciation and $1.7 million of other closure-related costs, which amounted to $0.32 per share after-tax due to the permanent curtailment of I-joist production at our Roxboro, North Carolina facility. In the first quarter of 2021, total U.S. housing starts increased 10% compared to the same period last year. Single-family housing starts, the primary driver of our sales volumes, increased 20%. Given the extraordinary market conditions caused by stronger than typical demand during the winter months and the ongoing imbalance between industry supply and product demand for wood-based commodities, both businesses delivered tremendous financial results during the period. Our Wood Products manufacturing business reported segment income of $97.1 million in the first quarter compared to $3.8 million in the year-ago quarter. Wood Products continued its focus on increasing manufacturing production rates in response to strong end product demand, particularly for Engineered Wood Products (EWP). Our Building Materials Distribution business reported segment income of $120.2 million on sales of $1.6 billion for the first quarter compared to $29.3 million of segment income on sales of $1 billion in the prior year quarter. BMD sales and income were strong throughout the first quarter as our retail lumber yard customers relied on our broad base of inventory and high service levels to minimize their working capital investment given the historically high commodity product prices. Kelly will walk through the financial results in more detail and then I'll come back and provide an outlook before we take your questions. Kelly?

Kelly Hibbs, CFO

Thank you, Nate. Wood Products sales in the first quarter, including sales to our Distribution segment, were $432.3 million compared to $320.1 million in the first quarter of 2020. As Nate mentioned, Wood Products reported segment income of $97.1 million in the first quarter compared to $3.8 million in the prior year quarter. Reported EBITDA for the business was $110.4 million, up from EBITDA of $33.4 million reported in the year-ago quarter. The increase in segment income was primarily due to higher plywood, lumber, and EWP sales prices, as well as higher I-joist sales volumes. These improvements were partially offset by higher wood fiber and other manufacturing costs. Additionally, first quarter 2020 results included accelerated depreciation and other closure-related costs of $15 million and $1.7 million at our Roxboro, North Carolina facility, as previously mentioned. BMD sales in the quarter were $1.6 billion, up 56% from the first quarter of 2020. Sales volume and sales prices increased by 34% and 22%, respectively. The business reported segment income of $120.2 million or EBITDA of $126 million in the first quarter. This compares to segment income of $29.3 million and EBITDA of $34.6 million in the prior year quarter. The increase in segment income was driven by a gross margin increase of $115.3 million, resulting primarily from improved sales volumes and gross margins on substantially all product lines, particularly commodity products compared with the first quarter of 2020. This margin improvement was partially offset by increased selling and distribution expenses of $20.5 million. The amounts for unallocated corporate cost 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 $12 million in the first quarter of 2021 compared with negative $7.5 million in the first quarter of 2020. The increase was primarily due to higher incentive compensation driven by our exceptional financial results.

Nate Jorgensen, CEO

Turning to slide 5, our first quarter sales volumes for I-joist were up 20%, while sales volumes for LVL were down 7% compared to the first quarter of 2020. Demand for EWP continues to be strong in 2021, fueled by increased housing starts and a higher proportion of single-family starts. Pricing in the first quarter for I-joist and LVL were up 9% and 5%, respectively, compared with the fourth quarter of 2020. As previously announced, price increases took effect, and certain temporary price protection arrangements expired. We expect EWP prices to continue to increase sequentially during 2021, reflecting pricing actions taken in late 2020 and thus far in 2021.

Kelly Hibbs, CFO

Turning to Slide 6, our first quarter plywood sales volume in wood products was 303 million feet compared to 318 million feet in the first quarter of 2020. The lower volume for plywood sales reflected our continued work to optimize veneer into EWP production. Rolling curtailments at our Elgin plywood facility as we manage environmental permits and log supply availability, periodic short-term disruptions related to COVID-19, and a significant winter storm in Louisiana during February 2021. The average plywood net sales price in the first quarter was $556, up 108% from the first quarter of 2020. Plywood demand and pricing continue to strengthen, and pricing reached historical levels during the first quarter. The strong plywood price momentum continues with prices thus far in the second quarter approximately 35% above our first quarter average.

Nate Jorgensen, CEO

Moving to Slide 7, BMD's first quarter sales were $1.6 billion, up 56% from the first quarter of 2020. By product area, BMD's commodity sales increased by 106%, general line product sales increased by 19%, and EWP increased by 21%. Gross margin dollars generated improved by $115.3 million in the first quarter compared with the same quarter last year. The gross margin percentage for BMD was 15.1%, up 250 basis points from the 12.6% reported in the first quarter of 2020 and up 210 basis points sequentially. The impact of the escalating commodity price environment in the first quarter is evident in our sales mix and gross margin percentage expansion. BMD's EBITDA margin was 7.7% for the quarter, up from the 3.3% reported in the year-ago quarter, also due to improved leveraging of selling and distribution costs. I'm now on Slide 8. This slide shows the continued rise in lumber pricing in the first quarter of 2021 and into the first part of the second quarter. Strong demand, when coupled with capacity constraints, continue to create supply/demand imbalances in the marketplace and historically high pricing levels for commodity lumber and panel products. Pricing movements from current levels will likely be determined by the strength of end market consumption and industry operating rates. Moving to Slide 9. On that slide, one can see a similar pricing pattern for the Random Lengths composite panel index, which continued to increase during the first quarter of 2021 and early second quarter due to mild winter weather, better than expected demand, and continued industry operating challenges. On Slide 10, we have set out the key elements of our working capital. Net working capital excluding cash, income tax items, and accrued interest increased by $149 million during the first quarter, representing a seasonal use of cash. The increase in accounts receivable was driven by exceptionally strong sales in March 2021. Inventories increased in both segments, particularly BMD, as we worked to maintain service levels and keep pace with the current demand environment. The inventory growth and the extended terms offered by major vendors led to the increase in accounts payable. As is normally the case, we also used cash to pay out incentive compensation and customer rebate accruals during the quarter, reducing accrued liabilities. I'm now on Slide 11. We finished the first quarter with $457 million in cash. Our total available liquidity at March 31 was approximately $802 million, which reflects our cash and availability under our committed bank line. We had $444 million of outstanding debt at March 31, 2021. We expect capital expenditures in 2021 to total approximately $90 million to $100 million. Included in our capital spending range is the completion of a log utilization center project at our Florien plywood and veneer plant and a new door assembly operation in Houston. In addition, our Nashville team has done a great job growing sales since our 2018 acquisition, and our 2021 capital spending plans include a project currently underway to expand our distribution capabilities in that market. Our capital expenditure range could increase or decrease as a result of a number of factors, including acquisitions, efforts to accelerate organic growth, exercise of lease purchase options, our financial results, future economic conditions, availability of engineering and construction resources, and timing and availability of equipment purchases. Our effective tax rate is expected to be between 25% and 27% in 2021, with ongoing federal legislation activity expected to increase tax rates in 2022 and beyond. We also estimate remitting between $130 million and $150 million of tax payments during the second quarter of 2021 as we extend 2020 income tax filings and pay estimated payments on 2021 income. We remain well-positioned with sufficient cash and reserves to support internal growth initiatives, anticipated working capital uses, as well as opportunistic acquisitions as we move through 2021. We will take a prudent approach to capital allocation when evaluating organic and M&A opportunities. As we have demonstrated in the past, if our cash exceeds opportunities ahead of us, we will utilize mechanisms to return cash to our shareholders. Our overarching objective remains to successfully grow our business while generating appropriate returns on shareholder capital. I will turn it back over to Nate to discuss our business outlook. Thanks, Kelly. I'm on Slide number 12. While there continues to be a heightened level of economic uncertainty, low mortgage rates, and continuation of work-from-home practices by many in the economy, the demographics in the U.S. have created a favorable demand environment for new residential construction, particularly single-family housing starts, which we expect to continue in 2021 and into next year. Furthermore, with homeowners spending more time at home, repair and remodel spending may remain elevated as homeowners invest in existing homes. The April Blue Chip Consensus for U.S. housing starts is 1.55 million for 2021. Although we believe the current U.S. demographics support the higher level of forecasted housing starts and many national homebuilders are reporting stronger near-term backlogs, supply-induced constraints on residential construction and repair and remodeling activity may continue to extend build times and limit activity. In the face of strong end product demand, wood products have done an excellent job of focusing on the needs of their customers and continue to make every effort to increase production rates. We also continue to 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. In the distribution arena, BMD has done a terrific job of executing and responding to market opportunities at both the local and national level. Effectively managing the impacts of commodity price changes will remain at the forefront for our distribution team during 2021. Strong demand, when coupled with capacity constraints in the first quarter of 2021, have created supply demand imbalances in the marketplace and historically high pricing levels for commodity lumber and panel products. As a wholesale distributor of a broad mix of commodity products and manufacturing of certain commodity products, our sales and profitability are influenced by the changes in commodity product prices. With uncertainties in demand and difficulties in judging the appropriate operating rates, commodity wood products pricing is likely to be volatile in the months ahead; we'll react appropriately. As we wrap up our formal comments, I want to express my appreciation for the focus our associates have maintained on safety in supporting the needs of our customer and supplier partners during these extraordinary market conditions. Our proven values of integrity, safety, respect, and the pursuit of excellence in service have served us incredibly well as we have navigated through the pandemic and will continue to be our foundation moving forward. We will continue to ensure we use our operating and financial strength to the benefit of our customers, suppliers, communities, and shareholders. Finally, I'd like to take this opportunity to thank and congratulate Wayne on his upcoming retirement and his nearly 36 years of outstanding service and dedication to Boise Cascade. The impact Wayne has made on the company is clear. His fingerprints are on many elements of our strategy and have put the company in a strong financial position to further our work and our strategy. Beyond the numbers, Wayne has brought a level of passion, commitment, and drive for excellence that is found throughout our organization. The same attitude and approach that shows up in Wayne's work across the Boise community as well. I will certainly miss Wayne's energy and experience. The Boise area will clearly benefit as he will continue to build upon his terrific work in the community. Wayne has set a very high standard for our organization and I have full confidence in Kelly to continue to build upon this success and momentum generated from Wayne and others. Wayne, all the best to you and Wendy on your well-deserved retirement.

Operator, Operator

At this time, we'd like to open the call with any questions.

Jesse Barone, Analyst

It's Jesse Barone on for Mark. First, congrats on your retirement Wayne, all the best wishes. And first question is, have you guys seen any kind of demand disruption or any deferral of products from the high commodity prices, especially on the repair and remodel side?

Nate Jorgensen, CEO

Jesse, it's Nate. Let me start that one. In terms of any kind of demand disruption, we really haven't seen it on anything related to single-family. As I mentioned in my comments, I think single-family is starting to accelerate as we go through the course of the year, consistent with what we might expect in the building season. I think in some areas, maybe some of the multifamily, like commercial projects, there may be a little more hesitation there. But I'm not sensing any demand destruction, perhaps just simply delaying some of the decisions that are being made in the multifamily sector. As for repair and remodel, we haven’t seen anything significant across our systems. I think the sales and pace and cadence on repair and remodel remain steady. We work closely with our partners downstream to ensure we're current with their expectations, moving forward, but the current demand environment on repair and remodel, to your question, remains steady and strong at this point in time.

Jesse Barone, Analyst

And then, just on the EWP side, can you kind of give us the state of your current order books and what kind of backlogs look like? And then on the housing starts side, does EWP have the capacity to support higher levels of housing activity, kind of like the $1.8 million to $2 million range?

Mike Brown, Head of Wood Products Operations

Yes, good morning, Jesse. It's Mike Brown. To answer your first question about the order files, our order files, like many others in this segment, continue to be extended. Look, I think most of the industry is really on allocation at this point in time. So we have ongoing demand stretched out for a number of months in front of us. So the order files are very, very strong. Regarding your question about industry capacity in general and whether it could meet demands at around $1.8 million in housing starts, I think based on what we're seeing today across the industry, that would be quite a challenge. Given the current situation where most manufacturers are already on allocation at approximately $1.5 million. Should housing starts increase significantly above that, I think there would be increased pressure to try and reach those levels. One of the major limiting factors would be the raw materials needed to produce more EWP.

Jesse Barone, Analyst

And then last one from me is could you guys kind of give us a sense of channel inventories and if freight and logistics have played a role in difficulties in rebuilding those inventories?

Jeff Strom, Head of Building Materials Distribution Operations

Jesse, this is Jeff. On the inventories, I would tell you they are lean everywhere across the channel. And as for the freight side, it is absolutely playing a big part in the replenishing of inventories across the board.

Kurt Yinger, Analyst

I just wanted to start off on EWP pricing. I mean, just with the flurry of announcements and some of the moving pieces around timing. Could you just talk about where you expect to be in terms of year-over-year improvements and realizations as we kind of exit 2021 and how you're thinking about, maybe I guess some trickle over into 2022 there?

Nate Jorgensen, CEO

Yes sure, Kurt. I'll start on that one. So yes, maybe just to level set. We have had three price increases: one in August, another in January, and then in late March, we announced one that will be effective at the start of June. So as we indicated in our script, we expect sequential pricing to improve from here. Now also that being said, if I were to direct you to Q1 to Q2, I’d have you think about 2% to 3%. These price increases, as we've discussed before, take time to work their way through the channel due to price protection arrangements we have. Typically, the roll-through is around a 9 to 12-month exercise. So as these continue to make their way through the system, we would expect to start seeing those benefits, but we're not going to see all that benefit until we get into 2022 based on the announcements we've made today.

Kurt Yinger, Analyst

Thanks, Kelly. And then very strong volume performance in BMD even against a tough comp last year. Could you just talk about some of the factors playing into that, and how your approach to maintaining and managing inventory has played into that relative to what you're seeing from competitors?

Nate Jorgensen, CEO

Yes, I think maybe I'll start with that, Kurt. Then I can ask Jeff to add any additional comments. Overall the demand environment remained strong across various products and services. We're seeing that certainly in commodities as well as general line products. Consistency and predictability in the business is incredibly important. We focus on ensuring we have the products and services necessary to support all our brands across all product categories. I think that consistency and predictability have been incredibly important for us, and that is our plan moving forward in support of our customers and suppliers. Our balance sheet has remained very strong, and we continue to invest in growing our current facility set and also looking to expand when appropriate. Kelly mentioned our expansion in Nashville; that represents how we think about the opportunity not only in new locations but also in investing in our core legacy locations to ensure we can service the marketplace effectively across our product and service categories. So, again, I think that's been incredibly important for us, and we’ll continue to exercise that proven approach as we move forward.

Kurt Yinger, Analyst

And then just on production and capacity, what are you most focused on in terms of being able to improve your throughput on the Wood Products side? Is it really a veneer constraint or more labor? Any color there? And then, on the BMD side, what are you hearing from your suppliers in terms of their ability to assess some of these material availability challenges?

Nate Jorgensen, CEO

Yes, Kurt, I'll weigh in on the production side of things. Yes, you've touched on a couple of important factors. In no particular order, it’s hard to make the types of EWP we produce unless you have the appropriate type of veneer, which we call stress-rated veneer. Producing more of that is critical, and only a limited amount of our internal veneer can go into EWP. We are working on ways to shift more plywood-type veneer into EWP, but there are limits to that. We are working on debottlenecking some machine centers we have in various locations, which is obviously a long-term goal. You've also mentioned labor issues. That was more of an issue several months ago during the pandemic, but we are still facing some labor shortages depending on geography. If we were fully staffed at all locations every day, that would certainly help. But at the end of the day, even if we were fully staffed, raw material inputs will remain a significant focus for us moving forward, both internally and in sourcing more from the outside.

Jeff Strom, Head of Building Materials Distribution Operations

Kurt, this is Jeff. On the BMD side, I can tell you that the people we do business with and their suppliers are doing absolutely everything in their power to increase production as much as they can. Sometimes they're held back by a lack of raw materials; other times it's due to labor shortages and COVID-related issues. But they're doing everything they can, and I assure you, we're in constant contact with them, working closely to manage these challenges.

Reuben Garner, Analyst

Thank you. Good morning, everybody. And apologies in advance if I duplicate any questions; I had some connection issues throughout the call. So first of all, congrats to Wayne and Kelly to you both. Well deserved. Wayne, enjoy retirement, and I look forward to staying in touch. So my first question is on the commodity environment. What do you think the risks are, or what kind of insight do you guys have into whether there's a lot of double ordering going on right now with no inventory in the channel and some transportation issues popping up? Is that a big risk and may be why prices are as elevated as they are right now? Could we see a pretty hard rollover at some point or is that not common?

Nate Jorgensen, CEO

Hi, Reuben. It's Nate. Maybe I'll start that one. About commodity pricing, we're running out of ways to describe what's taking place. It’s nearly impossible to predict due to the momentum and energy that remains in the market. The lumber prices just took another jump, further reflected in stunning numbers. Stepping back to look at the demand and supply equations, demand remains strong, especially with single-family housing starts that use significantly more framing materials than multifamily starts. Repair and remodel also remains strong. So, on the demand side, it's hard to identify anything that could disrupt things in the next couple of quarters. On the supply side, limitations do exist, including raw material inputs, staffing, and ongoing COVID-related challenges. Logistics are also playing a role in creating tension within the already stressed system. It’s very hard to make predictions when prices are at historic levels, but we'll manage and keep a close watch on it.

Reuben Garner, Analyst

So on that note, on the BMD side of the business, what are you guys doing to mitigate downside risk as the possibility of the market turns the other way? Are you keeping channel inventory volume levels relative to where they should be? Are you doing anything different with contracts or discussions with your customers? Or are you taking the same approach, where you're in the market every day and we'll work it out?

Jeff Strom, Head of Building Materials Distribution Operations

Reuben, this is Jeff. We are indeed taking the same approach; we're in the market every day, buying and selling as we always have. We will continue to purchase according to our sales pace, as we have always done. We have many tools at our disposal to help identify and mitigate risk. We've engaged in a lot of planning and discussions to set up for that. We've dealt with similar situations before, and we will manage through this one as well.

Reuben Garner, Analyst

I'm going to sneak in one more, and you might have already answered this. But can you remind us what's happening in the LVL market? The volumes are lagging behind the I-joist? And what we're seeing in the broader housing market? I know there's an answer; I just can't remember what it is. Can you tell me what the disconnect is?

Mike Brown, Head of Wood Products Operations

Yes, Reuben. It's Mike. You would recall that I think we discussed this last quarter as well. The ongoing theme has been that with the very strong demand for single-family housing, people are turning more and more to I-joists rather than traditional lumber materials. Our customers are purchasing more I-joists, and as a result, the order files have shifted more toward I-joists. Hence, LVL has seen a decline. That's where the demand is, so we move our production accordingly to meet our customer base’s needs.

Reuben Garner, Analyst

Thanks, Mike. I was thinking it was coming out of the plywood side not necessarily LVL. I forgot that component, so thank you for reminding me. And congrats on the quarter, and good luck to you guys in the import.

Jonathan Hall, Analyst

Thank you for taking my questions this morning. I was wondering what has been a greater impact on the high cost of just all these raw materials out in the market lately. Could you say it's more of the raw material shortage from landowners or is it more of a challenge on the distribution side which is a greater influence?

Nate Jorgensen, CEO

Jon, this is Nate Jorgensen. Regarding pricing, I think it's the marketplace at work. We’re seeing a strong demand environment that's accelerating. Part of that demand is single-family housing that consumes more framing material. Currently, access to logs isn't a limiting factor; it's converting capacity in manufacturing. We've talked about the impact of COVID on staffing and disruptions. Those have improved somewhat in the past 30 days, but they continue to be something we manage daily. Additionally, many input materials are impacted, as supply chains across many products are stressed. Some of that is logistics-related, but there are other factors to consider. So production remains the primary challenge rather than distribution at this point.

Jonathan Hall, Analyst

Let's see, another question I have, which is more on behalf of a friend of mine: on the raw materials side with the price of logs, if those - if the supply of logs is constrained, how much is the change in price of logs affecting you guys? If it is indeed a shortage of those raw materials, are there any plans in place for mitigating the risks from landowners and log prices starting to skyrocket significantly or is it not really much of an issue?

Nate Jorgensen, CEO

Yes, Jonathan. I would answer your question like this. Different geographies face different challenges regarding log pricing. In the Southeastern U.S., there are many reports of abundance in log supply that will likely remain for the next decade. However, in your area, the Pacific Northwest, log pricing has started to go up. More recently, pricing has risen somewhat, particularly in certain locations. Our philosophy has always been to buy the market, both logs to be delivered now or under contract to harvest over several years. We're not having an issue today buying logs, but they are getting more expensive, with some locations experiencing more significant price increases.

Jonathan Hall, Analyst

All right. Yes, thank you. And we'll see. I think that covers it for now. I believe all my other questions have been answered from previous responses. So thank you for that. Congratulations on the quarter. Hope things continue to look up. Thank you for taking my call.

Nate Jorgensen, CEO

Yes, for sure. Thank you.

Wayne Rancourt, CFO

Nate, if you don't mind, I would like to make just a quick comment and Jeff as we wrap up. Since our IPO, it has been a great pleasure to work with the sell-side group that's covered us. And I appreciate all the help and support in getting our story in front of investors. I think companies made great progress since the IPO in migrating our business mix, both on the manufacturing side and in growing our distribution business. I feel incredibly good about the current state of the company. I think we've done a really good job through this succession process of also having the right people in the right roles. If I think about the business going forward, part of the reason I'm leaving is I feel exceedingly comfortable about where we are from the balance sheet, business mix, and frankly, the leadership of the company. I want to express my personal thanks to the team covering us. It's been a great group to work with, and I appreciate all the non-deal roadshows and conferences, and the attention on calls like this have helped us tell our story. It's been much appreciated, and all the best to all of you.

Nate Jorgensen, CEO

Thank you, Wayne.

Kelly Hibbs, CFO

Thanks, Wayne. Maybe we will close up the call. We appreciate everyone joining us on the call this morning for the update, and thank you for your continued interest and support of Boise Cascade. Be safe and be well. Thank you so much.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Presenters, please stay on the line for the post-conference.