Boise Cascade Company (BCC) Q3 2015 Earnings Report, Transcript and Summary

Good morning my name is Amanda and I will be your conference facilitator today. At this time, I would like to welcome everyone to Boise Cascade Third Quarter 2015 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. [Operator Instructions] Before we begin, I’d like to 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 these results anticipated, please refer to Boise Cascade’s recent filings with the SEC. It is now my pleasure to introduce to you to Wayne Rancourt, Executive Vice President, CFO, and Treasurer of Boise Cascade. Mr. Rancourt, you may begin your conference.

Thank you, Amanda. Good morning, everyone. I would like to welcome you to Boise Cascade’s third quarter 2015 earnings call and business update. Joining me on today’s call are Tom Corrick, our CEO; Dan Hutchinson, Head of our Wood Products Operations, and Nick Stokes, Head of our Building Materials Distribution Operations. Turning to slide 2, 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. Now I will turn the call over to Tom Corrick.

Thanks, Wayne. Good morning, everyone. Thanks for joining us today on our earnings call. I’m on slide 3. Our third quarter sales of $992 million were up 1% from the same quarter last year as a result of higher sales volumes, most of which was offset by the impact of lower prices for many of the commodity Wood Products that we manufacture and distribute. Our net income was down 32%, principally due to lower plywood and lumber prices in our Wood Products manufacturing business. Our building materials distribution business reported a good quarter despite headwinds from product price deflation. The BMD performance demonstrates the earnings potential of the business as U.S. housing and the general economy continue to strengthen. We continue to make good progress on our accelerated strategic capital program. We worked through the start-up issues on the new drier in Chester, South Carolina and saw progressively better production performance at that mill during the quarter. During a nine-day curtailment at our Elgin, Oregon mill in early September, we completed the log utilization modernization and expect to see the benefits of that project beginning in the fourth quarter. The modernization of our Florien, Louisiana plywood operations remains on schedule for completion late -- mid next year. We purchased 547,826 of our shares in the third quarter for $17.6 million. We expect to continue to use opportunistic share repurchases to deploy capital at increased shareholder value. The timing and amount of repurchases will be balanced against potential acquisition opportunities. With falling commodity prices this year and changes in capital market conditions, we believe the acquisition environment has improved for strategic players such as ourselves that have liquidity and balance sheet capacity. I will have Wayne cover the financial results in more detail and then I will come back with a few more comments on the outlook before we take your questions.

Thank you, Tom. Turning to slide 4, Wood Products third quarter sales, including sales to our building materials distribution segment were $341 million, down 4% compared with last year’s third quarter. The decrease in sales was driven primarily by 16% lower plywood prices and 13% lower lumber prices offset in part by higher laminated veneer lumber and plywood sales volumes. Wood Products reported third quarter EBITDA of $32.9 million, down $18.4 million from the prior year quarter. The decline in EBITDA compared to the year-ago quarter was due primarily to lower plywood and lumber prices, which together represented a negative sales price variance of $25.3 million compared to the prior year quarter. Sequentially, Wood Products EBITDA declined only $1.1 million despite $8.2 million negative price variance on plywood sales. The negative plywood price variance was largely offset by lower log costs, higher LVL sales volumes and higher I-joists prices. BMD sales in the quarter were $799 million, up 3% from the year-ago quarter. Volumes in BMD were up 8% and price deflation was 5%. BMD generated EBITDA of $25.8 million during the quarter, which was up 10% from the $23.5 million reported in third quarter of 2014. The increase in EBITDA was driven by higher gross margin dollars of $3.1 million, offset partially by increased selling and distribution expenses of $1.1 million. The corporate sector reported negative EBITDA of $4.2 million in the quarter, down from the $5.8 million reported in third quarter 2014. Corporate costs were lower primarily due to lower incentive compensation costs. Turning to slide 5, our third quarter plywood sales volumes and Wood Products were up 16 million feet or 4% from the same-period a year ago. The $282 average net sales price for plywood was down $53 from last year’s third quarter and $20 lower than second quarter of this year. Much like we saw in the third quarter, the upcoming comparison to last year’s strong 4Q plywood pricing will be very difficult. The North American industry operating rate has been negatively impacted this year by increased imports of plywood from South America, driven by the relative strength of the U.S. dollar. As we start the fourth quarter, plywood pricing is about 5% below the third quarter averages as reported by Random Lengths. We have taken market related production curtailments at our Wood Products plywood operations in Louisiana and South Carolina this month in response to the declines we have seen in end product prices. We will continue to closely watch market conditions as we move through the balance of the quarter and adjust our production to demand levels. Turning to slide 6, our third quarter sales volumes for LVL and I-joists were up 5% and 1% respectively compared with the year-ago quarter. LVL pricing was essentially flat while I-joists sales price realizations improved 2% from the year-ago quarter. Last year’s third quarter saw heavy EWP sales volume activity as purchasers accelerated purchases in response to an announced price increase. We haven’t seen any unusual supply chain behavior this year. So we do not currently anticipate the same magnitude of falloff in EWP sales volumes in the fourth quarter as we experienced in 2014. Moving to slide 7, BMD’s third quarter sales were $799 million, up 3% from the year ago quarter. By product area, BMD’s sales of commodity products decreased 2%, general line products increased 8% and EWP increased 7%. The gross margin percentage for BMD was flat with last year’s third quarter and up about 0.5 point from the second quarter of this year. On slide eight, we have set out the key elements of our working capital. Company net working capital, excluding tax items and accrued interest, decreased $8.1 million during the third quarter. BMD's inventories declined by $20 million during the quarter as seasonal product sales volumes increased as would be expected. This was partially offset by a $9 million increase in Wood Products inventories. Accounts payable declined in the quarter as a portion of the extended terms on selected products we distribute came due in the third quarter. BMD had additional extended term payables that will be paid in early November. As a reminder, the statistical information is filed as Exhibit 99.2 to our 8-K and it has the receivables inventory and accounts payable data broken down by segment for those that are interested in more detail. I'm now on slide nine. Our cash balance increased by $17.9 million in third quarter and we ended the quarter with total available liquidity of $505 million. As Tom mentioned, we repurchased $17.6 million of stock in the third quarter and we expect to continue to deploy our cash for either acquisitions or additional share repurchases going forward. In the quarter, our effective tax rate was 36.5%. At this point, we would expect our book tax rate for 2015 to be in the range of 36% to 38%. Tom, I will turn it back over to you.

Thanks, Wayne. The current consensus estimate of 1.13 million for 2015 US housing starts is slightly above our original planning level of 1.1 million starts. Housing demand has strengthened over the past several months after a slower than expected start to the year. We continue to believe the demographics in the US will support a return to a normalized housing start level of 1.4 million to 1.5 million. With that in mind, we are managing our business assuming a favorable backdrop of increasing general economic activity, improving employment and accelerating new residential construction levels. Our priorities remain to focus on operational excellence while pursuing organic and strategic growth. We want to grow organically and pursue acquisitions that we believe will provide a favorable return to our shareholders. Additional share repurchases are another avenue we expect to use to deploy excess cash and create value for our investors. Effective capital deployment remains at the forefront among our senior leadership team and our Board of Directors. In closing, we are making good progress on a number of fronts and believe the economic and housing recovery will provide additional opportunities as we close out the fourth quarter and transition into 2016. Thank you again for joining us on our call this morning. We would welcome any questions at this time. Amanda, would you please open the phone lines?

Thank you. [Operator Instructions] Our first question comes from James Armstrong of Vertical Research. Your line is now open.

Good morning. Thanks for taking my question.

Hi, James.

The first question I have is, given that you are running both production and distribution, what are you seeing in terms of inventory in the Wood Products as we go into the winter season?

James, this is Nick Stokes from the distribution side. I would tell you that certainly our inventory as well as what we see in terms of the visibility of our customers’ inventory is sufficient and it’s not heavy given the seasonal nature of our business, but it's not under-bought. There is not a lot of statistical information that helps add color to that, but that's sort of how it looks and feels at the moment.

And this is Tom Corrick and I would add that at the manufacturing level we are not dealing with excess inventory problems right now.

Okay, so it seems like everything is basically in line, but not particularly tight. On that a little bit, are you seeing any of the signs of plywood from Latin America abating as we go into the fourth quarter? We’ve seen prices come up a little bit off of their bottom and you’ve definitely seen it in OSP, but are you seeing the plywood imports come off and the market seem to be normalizing a little bit?

If you look at the data, it would show that the shipments into the US out of Brazil were down a little bit in the third quarter, but I would tell you that I think we are seeing as much as anything. It’s just the timing of when vessels arrive into the US and I don't think we've seen any slowing in those shipments.

Okay. And then lastly, on acquisitions, where are you seeing the most opportunity? Is it in building materials or building distribution or Wood Products and where in the supply chain are you seeing the most opportunities?

On the manufacturing side, we’ve seen a couple of transactions that have cleared the market. And our assessment and again we will see how this plays out over the next six months, but our assessment is given that back up in the capital markets, particularly in high yield, that we may be in a more competitive position going forward, but it's -- primarily it's the clearing that we're seeing on the acquisition side on the manufacturing side. We really haven't seen much at our level in two-step transaction-wise on the distribution side.

Okay, that helps. Thank you very much.

Thank you. Our next question comes from Ketan Mamtora of BMO Capital Markets. Your line is open.

Good morning, Wayne, Tom.

Good morning, Ketan.

First question on the distribution business, can you talk about what drove the margins in this quarter especially when we saw commodity pricing really falling this quarter?

Ketan, this is Nick Stokes. So the margin specifically was driven by increased volumes of both products that carry higher margins, the general line, EWP, and that have the service component to it. And certainly the market and pricing environment for wood commodities was not favorable, it wasn’t terrible, it wasn’t favorable. Steel pricing continues to be very challenging, but it was the mix issue driven primarily by increased levels seasonally appropriate of general line and EWP.

Understood. And as you move into the fourth quarter, do you expect this mix to come down a little bit, mostly all seasonally driven?

Yeah, I would tell you that two things happen. I would remind everybody that the third quarter is generally the best quarter that BMD has in terms of overall sales volumes as demand -- certainly as builders try to finish up projects, get them framed up for the winter. So you are staring at a seasonal volume impact as well as just the mix and some of the products like composite decking that we sell a lot of, they don't install as many of those in the winter as they do the summer.

Understood. Switching gears to on the Wood Products side, the lumber pricing that you reported was a little better than what we were expecting. Random Lengths on this index also fell quite sharply, but you guys seem to have done a little better. Was there some sort of a lag in this quarter or was it business mix was a little different. Can you just help us reconcile that a little bit?

I think there probably is a bit of a business mix there. We did, I think as you’ve seen, we did see significant reduction in price than we tend to trend with those indexes overtime.

Thank you. Our next question comes from George Staphos of Bank of America Merrill Lynch. Your line is open. Please check your mute button. Our next question comes from Alex Ovshey of Goldman Sachs. Your line is open.

Couple of ones for you. So on these imports from Brazil, did you have a sense of the magnitude that they can get to overtime?

Alex, this is Wayne. I think the issue for Brazil is really going to be where they are going to direct it. If you look at the ‘15 year-to-date numbers, the exports from Brazil, about 16% are headed to the US. So obviously they could shift more volume in the direction of the US if currency is made that makes sense, just to give a little background. If you look at that compared to 2014, shipments out of Brazil to Germany have dropped from 16% to 15%. Belgium has dropped two percentage points. Italy is down one percentage point, Holland is down 1%, UK is down 1. If you look at that, the stuff headed to Europe is down 6 and some other minor shifts and the US is up 8% from around 8% in ’14 to currently running about 16% of the exports from Brazil. And as Tom Corrick mentioned, we really haven't seen much of a meaningful increase second quarter to third-quarter. September had relatively high imports at 23 million cubic feet, but that was down from the 28 that we saw at the high point in June. So we're really watching it month by month and adjusting our production with demand.

That’s helpful. And what if you, going back to ’04, ’05, was most of the Brazilian production exported to the US in that timeframe. So over the last 10 years, they have really diversified their customer base to include a much more diverse set of countries, would that be fair?

Yes. I think it’s fair to say that the last four or five years, the amount that’s come in to the US has been quite low certainly compared to ‘05 and ’06 and part of what was going on in ’05, ‘06 is you had incredibly high US housing starts, we’re at 2 million starts, which was well above historic trends and builders on the supply chain were basically scrambling to find panels whether it was from plywood, LSB or imports and I don't think we have that situation today. So I'm not nearly as concerned that they will elevate back to the levels that occurred a decade ago.

The relative size of the industry is measured by production data, Alex, shows that the Brazilian industry hasn't operated at the levels it operated in the mid-2000s and well over five years. So there is -- clearly if they want to ramp up production from where they were, then they have got some work ahead of them.

Okay, that's helpful. And then can you say a little bit more about the properties that are available, I mean what business lines, what is the potential range in terms of size of targets that are out there?

It wasn’t directly in our industry, but probably the most recent transaction that was announced and not one that we did is Canfor just bought Anthony Forest Products and I believe the multiple that they disclose with 5.8 times, so that we thought was encouraging.

But do you think there are more opportunities in distribution and is there anything to do in manufacturing at this point?

Well, I think on the distribution side and again, we have a large national footprint today. So as we look at acquisitions and distributions, that will involve also looking at adjacent businesses. On the distribution side, we continue to see a lot of acquisition activity with the people that are involved in one step roofing. US LVM continues to make acquisitions, obviously ProBuild and Builders FirstSource came together through M&A. We expect stock in BMC West or BMC to close later this year. So there continues to be a fair amount of activity in distribution and on the manufacturing side, we believe and again it remains to be seen that we believe that with the lower commodity prices and the disruptions in the capital markets that that will create opportunities over the next 6 to 12 months.

Got it. Okay. And just on share buyback, two quick points, so if you've done anything quarter to date in the fourth calendar quarter and why not do more in the previous quarter, I mean the stack really came off materially, I think we can argue earlier potentially was even trading below where some of these M&A comes, you talked about maybe even below where you purchased the Chester Moncure assets if you were to use that same plywood price that was employed at that point. Why weren’t you more aggressive in share buyback in the quarter?

Well, again, we are balancing share buybacks on what we see for activity levels on potential M&A and other uses for capital and then the other part that you have to keep in mind is we can trade when we are in possession of material non-public information, whether that’s around earnings or M&A and other activities and I would tell you that as a company, we’re relatively careful on that. So unless we utilize a trading plan, you should probably anticipate that we’re going to consider ourselves blacked out from an earnings standpoint from early in the third month of any quarter.

Okay. Does that mean you haven't done anything quarter to date in the fourth quarter?

Correct.

Thank you. [Operator Instructions] Our next question comes from Steve Chercover of D.A. Davidson. Your line is open.

So, Wayne, you said a couple of times that your downtime is predicated on matching supply to demand and that's great. Can you remind us some of the more calculus involved, I mean I think it’s cost of capital as opposed to cash returns, but I would assume that you are still earning appropriate returns, so it’s more on the supply and demand at this stage?

Yes. I mean without getting into too much of the science, we are very focused on generating an appropriate return on capital and we don't think that's accomplished in this industry if we ran the cash breakeven. We think you’ve got to look at what the order files are, where we are seeing demands and keep an appropriate level of supply and an appropriate time on order files in front of us. But generally if we are out two to three weeks on order files, there is a pretty good balance in the market. If order files get extended longer than that, it doesn’t necessarily work well for us or our customers and certainly if we’re trying to sell whether that’s being manufactured in the current week, that’s not constructive from our standpoint. So we really do try to look at the demand side and balance our order files to kind of two to three weeks and we think that’s constructive both for buyers and sellers. And we’re interested in running till we get the cash breakeven on a variable cost basis.

Glad to hear that. And then with respect to the consensus outlook for housing of $1.3 million. I don’t think anyone cares what I think, but it still seems a little aggressive to me. Are you basing your 2016 operating stance on that number?

No, I mean, we came into this year at $1.1 million and if you asked us to give you our best guess for 2016 at this point, we are planning around $1.250 million and still planning on the multifamily component of that being somewhere in the 38% percent range. And as you know, the single-family component is the one that really drives the majority of the consumption on Wood Products. The multi starts use about a third of the products that would go into a single-family start.

Understood. And then finally one other follow-up on the M&A opportunity. I think I’ve seen a couple of deals recently on lumber and they were at reasonable prices, but haven’t seen anything or maybe I’ve missed it on panels on EWP, but that’s -- I assume that still remains your preference?

Yes, that’s still the highest priority. I mean that’s where we think we can add the most in terms of synergies, whether it’s trade or sales and marketing or administration, so our strong preference would be to do something in the veneer-based business and a lot of the assets are in family hands or in the hands of strategists. There is not a lot of assets that we are interested in that are in sitting in the hands of private equity. And so it really is a timing on opportunity and we are trying to maintain a balance sheet that gives us the flexibility to execute on a fairly short horizon, because in a lot of cases, these are driven by family situations that are pretty dynamic and we want to be able to respond to those quickly.

You’ve always been consistent there. And just a final question. The debottlenecking that you’re doing down at Florien than elsewhere, how much capacity might that add in 2016?

Basically, Steve, I mean, when I was talking in my comments as I said mid-year, that’s actually the time that dry holes startup, there are related projects that will startup later in the year, so the final startup of everything in the mill would be close to the end of the year. The incremental of veneer capacity that will come out of that about, it’s about 100 million feet, but our focus, I think as we have mentioned previously is that our plans are to focus that veneer on the EWP business and our intension is not to see that in the form of EWP business as the EWP or housing markets continue to grow and our focus is not on producing additional plywood with that veneer.

Great. Okay, thank you both.

Thank you. Our next question comes from George Staphos of Bank of America Merrill Lynch. Your line is open.

Hi guys, this is actually John Babcock on for George. I had a technical issue before. Just quickly, I was wondering if you guys could talk about operating rates in Wood Products, so for both plywood and EWP?

John, this is Wayne. I think on the EWP side, our estimate is that the industry is probably operating somewhere in the 75% range, low-70s. And on panel side, a year ago, I would have said, we were probably operating as an industry in the low-90s, I think today, it’s probably in the mid-80s, maybe 84% and the difference is the import activity. And on the pine lumber side, that has been fairly weak because people that typically cut dimension has shifted in a couple of cases over cutting pine lumber that impacts the markets we are in. And then in the fourth quarter, we are anticipating that because of the forest fires in the west that there will be a fair amount of pine logs that become available and there may be an oversupply situation on inbound logs, which will obviously help on log cost, but may encourage more product to get produced in the fourth quarter and first quarter as people try to get that cut before it deteriorates. So we’re a little cautious on our pine lumber business over the next couple of quarters.

Okay, sounds good. And with regards to -- I think, you talked earlier about some curtailments at the two mills, I mean, is that predominantly on the plywood side I am guessing then?

Yes, and I would anticipate that we will continue to watch that as we go through October, November and December.

Okay, great. Thanks. And then moving on to kind of the supply chain, I was wondering if you could talk about the ability of the supply chain to ultimately react to the anticipated 2016 housing starts level and repair and remodel activity? And then also if you could give your sense as far as where you expect repair and remodel activity to move in 2016?

I’ll talk to the new residential and I’ll let Wayne speak to the repair and remodel activity. You know, I think that if we are at $1.250 million, the industry will be reasonably well-positioned to respond to that. If you look at housing starts for the last six months, they’ve actually been averaging over 100,000 starts a month, so clearly industry is demonstrating the capability to sell that order demand. And so I would think that at least in the places where we are playing that will be absorbed as we get towards the $1.3 million, if that actually happened, I think that would start to become pretty challenging.

And on the repair and remodel side, the activity has been pretty good this year if you look at the big box same store numbers. The encouraging thing is the Joint Center for Housing Studies of Harvard just published their view on 2016 and they are expecting remodel activity to be up 6.8% in the second quarter 2016. So a pretty good year in 2016 if they are right compared to 2015, and I think where we really see the influence on that is in Nick’s business and on the plywood side, if that comes to fruition.

Okay, great. Thanks for that. And then just lastly, could you talk about veneer prices on ultimately how that’s moved kind of throughout the quarter, since we don’t have a lot of clarity on that front?

Veneer pricing has generally trended up in the summers that always does, and it’s trending down now. We don’t buy a lot of veneer on the outside, we just do buy some on West Coast and we don’t sell very much.

Okay. And is that -- I mean, where do the level stand right now relative to where they ended the quarter?

Down slightly.

Okay, great. Thanks for your help guys.

Thanks, John.

Thank you. I am showing no further questions. I would like to turn the call back to Wayne Rancourt for closing remarks.

Okay. Thank you everyone for joining us. I appreciate your time. If you have any questions, we will be around for follow-up. Amanda, thanks for your help and we will talk to everyone after year ends. Have a great day.

Ladies and gentlemen, thank you for participating on today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.