Boise Cascade Company (BCC) Q1 2021 Earnings Report, Transcript and Summary

Good morning. My name is Jeff and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the 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. [Operator Instructions] Questions will be taken in the order they are received. [Operator Instructions] 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 result anticipated, please refer to Boise Cascade's recent filings with the SEC. It is now my pleasure to introduce to you to Kelly Hibbs, Incoming Senior Vice President, CFO and Treasurer of Boise Cascade. Mr. Hibbs, you may begin your conference.

Thank you, Jeff. Good morning, everyone. I'd like to welcome you to Boise Cascade's first 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; 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.

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 first quarter 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 cost or $0.32 per share after-tax due to the permanent curtailment of I-joist production at our Roxboro, North Carolina facility. In first quarter 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 ongoing imbalance between industry supply and then 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 focused on increasing manufacturing production rates in response to strong end product demand, particularly for 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 to segment income on sales of $1 billion and a comparative 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 to the financial results in more detail and then I'll come back and provide an outlook before we take your questions. Kelly?

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 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 due primarily to higher plywood, lumber and EWP sales prices as well as higher I-joist sales volumes. These improvements were offset partially by higher wood fiber and other manufacturing costs. In addition 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 first quarter of 2020. Sales volume and sales prices increased 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 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 first quarter 2020. This margin improvement was offset partially 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 first quarter 2021 compared with negative $7.5 million in first quarter 2020. The increase was due primarily to higher incentive compensation driven by our exceptional financial results. Turning to slide 5, our first quarter sales volumes for I-joist were up 20%, while sales volumes for LVL were down 7% compared with first quarter 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 first quarter for I-joist and LVL were up 9% and 5%, respectively compared with fourth quarter 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. Turning to Slide 6, our first quarter plywood sales volume in wood products was 303 million feet compared to 318 million feet in first quarter 2020. The lower volume for plywood sales reflected our continued work to optimize veneer into EWP productions - excuse me, 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 $556 average plywood net sales price in first quarter was up 108% from first quarter 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 second quarter approximately 35% above our first quarter average. Moving to Slide 7, BMD's first quarter sales were $1.6 billion up 56% from first quarter 2020. By product area, BMD's commodity sales increased 106%, general line product sales increased 19% and EWP increased 21%. Gross margin dollars generated improved by $115.3 million in 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 first quarter of 2020 and up 210 basis points sequentially. The impact of the escalating commodity price environment in 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 improve leveraging of selling and distribution costs. The trajectory of commodity products pricing during the back half of 2021 will have a key influence on BMD's financial results. 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 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 for the Random Lengths composite panel index, which continued to increase during 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 $149 million during the first quarter, representing a seasonable 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 also 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. The statistical information filed as Exhibit 99.2 to our Form 8-K has the receivables inventory and accounts payable data broken down by segment for those interested in the detail. I'm now on Slide 11. We finished first quarter with $457 million I'm now on slide 11. We finished first quarter with $457 million of 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 estimated remitting between $130 million and $150 million of tax payments during second quarter 2021 as we extend 2020 income tax filings and pay estimated payments on 2021 income. We remain well-positioned with sufficient cash and reserve 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 today 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, 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 homeowner 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 has done an excellent job of focusing on the needs of their customers and continues to make every effort to increase production rates. We also continue to focus on innovation to reduce our cost, 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 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 of 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, the pursuit of excellence of service incredibly well as we have navigated through the pandemic and we'll continue to be our foundation moving forward. We will continue to make sure we use our operating and financial strength with 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 and your well-deserved retirement. At this time, we'd like to open the call with any questions. Jeff, would you please open the phone lines.

[Operator Instructions] Your first question comes from the line of Mark Wilde from BMO Capital Markets. Your line is open.

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

Jesse, it's Nate. Let me - I'll start that one. I think in terms of any kind of demand disruption, we really haven't seen it on the - on anything on the single-family. As I mentioned in my comments, I think single-family, there's momentum and actually it seems to be accelerating 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's maybe a little more hesitation there. But I'm not sensing any demand destruction perhaps just simply delaying some of the decisions that - in terms of like in multifamily like commercial. On the repair and remodel, I don't - we haven't seen anything significant across our systems. I think the sales and pace and cadence on repair and remodel remains steady. And - obviously we work closely with our partners further downstream to make sure we're current with their expectations moving forward. But the current demand environment on repair and remodel to your question remains a steady and strong at this point time.

And then just on the EWP side, can you kind of give us a 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 kind of support higher levels of housing activity? Kind of like the $1.8 million to $2 million range? Thanks.

Yes, good morning, Jesse. It's Mike Brown. To answer your first question about the order files, our order files I think like many others in this particular segment continued 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. As it relates to your question about industry capacity in general and whether it could meet demands at $1.8 million or thereabouts million 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 get there. One of the major limiting factors would be the raw materials needed to make more EWP.

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

Jesse, this is Jeff. On the inventories I would tell you they are lean everywhere all the way through the channel. And then on the freight side it is absolutely playing a big part on that and replenishing inventories across the board.

Your next question comes from the line of Kurt Yinger from D.A. Davidson. Your line is open.

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?

Yes sure, Kurt. I'll start on that one. So, yes maybe just to level set. We have had three price increases so we had one in August. We had another one announced in January. And then in late March, we announced one that will be effective at the start of June. And so as we indicated in our script, we expect sequential pricing to improve from here, Kurt. 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 talked about before, they do take time to make their way through the channel because of the price protection arrangements we have, that typically that the roll-through is kind of a 9- to 12-month exercise. So as these things continue to work their way through the system, we would expect to kind of see that benefit. We're not going to see all that benefit frankly until we get out into 2022 based upon the announcements we've had today.

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

Yes, I think maybe I'll start with that, Kurt. And then I ask Jeff maybe to add any additional comment. I think overall the demand environment remained strong across a number of products and services. And we're seeing that certainly in commodities and as well as general line and obviously [indiscernible] as we've talked about. I think the consistency and the predictability, I think, that we bring to our business and BMD is really important. So I think our - we don't try to speculate on inventory. We want to make sure we're - we have the products and services necessary to support all of our brands, all of our franchises across all those product categories. And I think that consistency and predictability has been incredibly important for us to-date. And that is our plan as we move forward as an organization, again, in support of our customers and our suppliers moving forward. I think in terms of - our balance sheet has remained obviously very strong. And we continue to make all the necessary investments in terms of growing our current facility set, as well as looking to expand where appropriate. And I think as Kelly made in his comments, our expansion in Nashville, I think, represents how we think about the opportunity not only in new locations but, again, how we continue to invest in our core legacy locations to make sure, again, we have the capabilities to service and support the marketplace again all - across all of our products and services. So, again, I think that's been incredibly important for us. And, again, I think we'll continue to take - use that kind of proven script as we move forward as a kind of proven script as we move forward as an organization.

And then just on production and capacity, I mean, what do you kind of 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 I guess in - on the BMD side, what are you hearing from your suppliers in terms of their ability to address some of these material availability challenges?

Yes, Kurt, I'll weigh in on the production side of things. Yes, you've already indicated a couple that are important, okay. So in no particular order, it's hard to make the type of EWP we make unless you have the appropriate type of veneer, we call it stress-rated veneer. And so producing more of that is critical to not only us but other people that operate in this sector. So we're focused on trying to do more of that and there's only a limited amount of our own internal veneer that can go into EWP. But we are working on trying to find ways and means to shift more of what we would normally call plywood-type veneer into EWP. But there's a limit to that. We are working on debotteling some machine centers that we have in some locations. And that's sort of a long-term goal obviously. And you touched on the labor issue. Well, that was more of an issue going back six months or so, more in the middle of the pandemic, if you want to call it that. We are still facing some labor shortages depending on the geography. So if we could be fully staffed at all locations on all days that would certainly help. But at the end of the day, even if that was the case, raw material inputs are certainly going to continue to be imports certainly going to continue to be a big focus for us as we move forward both internally and whether we can source more from the outside.

Kurt this is Jeff. On the BMD side what I'm going to tell you is that the people that were doing business with their suppliers. They are doing absolutely everything in their power to increase production as much as they can. Sometimes it's held back a lack of raw materials, sometimes it's held back by a lack of labor and challenges that are happening with the COVID but they're doing everything they can and I will tell you we're in constant contact with them, the communication where we're tight with our vendor partners and doing everything we can to know what's going and tell them what we're seeing on our side so.

Got it. All right. Well, appreciate the color guys and good luck here in Q2.

Thanks, Kurt.

Thanks, Kurt.

Your next question comes from the line of Reuben Garner from The Benchmark. Your line is open.

Thank you. Good morning, everybody. And apologies in advance if I duplicate any questions, I had some connection issues throughout the call. So - well, first of all congrats Wayne and Kelly to you both. Well, deserved. Wayne, enjoy retirement and then 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 site - 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 sort of risk and may be why prices are as elevated as they are right now and we could see a pretty hard rollover at some point or is that not may be as common as it would seem?

Hi, Reuben. It's Nate. Maybe I'll start that one. I think on commodity pricing like I said, we're running out of ways to describe what's taking place there. And I would say, it's nearly I think impossible to predict given what's taking place and really the momentum and energy that remains in the market. I think the lumber print last night, I think even further accelerated off of just against stunning numbers. So I think as we look at kind of taking a step back as kind of the demand equation and what does that look like and on the supply side. And I think on the demand side as we talked about, the momentum and energy feels quite good as we move forward here through really 2021, especially in single-family which is as know consumes even more framing materials than a multifamily start would. Repair and remodel remains strong. So I think on the demand side, it's hard to see anything kind of get in the way of things here over the next couple of quarters. On the supply side, there are limitations of what can be done. And we've talked about some of those specific to our business just in terms of raw material input, staffing, COVID-related challenges and I think those are replicated across all commodity producers. And to your point, logistics is playing a role in this as well. I think that the challenges of getting truck really kind of across the system, as well as rail challenges in a few markets, just kind of creates even more tension on an already tension system. So, we see, again, it's very, very hard to predict again in these historic levels. But in terms of, when you step back and some of the fundamentals, they still seem to be in place. But again, we're going to obviously manage and monitor and watch it carefully. We've got the right team. We've got the right tools to make sure that we're as far out in front of that conversation as possible.

So on that note, on the BMD side of the business, what - if anything, are you guys doing to mitigate downside risk as I guess the possibility of the market turning the other way? Are you keeping - I guess can you tell us where inventory stands from a volume standpoint relative to normal and that will help mitigate? Are you doing anything different with contracts or discussion with your customers? Or are you guys taking the same approach you always have where you're constantly in the market every day and it'll work itself out?

Reuben, this is Jeff. We - we're kind of taking the same approach, we're in the market every day, we're going to buy and sell every single day like we always have. We will continue to buy to our sales pace, as we always have done. We do have many tools at our disposal to really help identify and mitigate risk. We've been lots of planning, a lot of discussions on doing that. And then it's something we've dealt with before and we'll deal with again as we move forward.

I'm going to sneak one more in and you might have already answered this, but can you remind us what - what's going on in the LVL market? The volumes there lagging 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 us what the disconnect is there?

Yes, Reuben. It's Mike. So you would appreciate that I think we discussed this maybe last quarter as well. So the ongoing theme has been that with a very strong demand for single-family housing, the ability or the need, maybe is a better way of putting it, to find material that otherwise might normally be 2x4s or 2x10s to be more exact. People are turning more and more to I-joists and as a result, when our customers ask us specifically put orders in ask us and specifically put orders in that the order file had moved more to an I-joist based where the files in and sort of LVL/I-joist combination. So we moved our production to where our customers were asking and so as a result LVL was down somewhat and I-joist were up. And so at the end of the day that's sort of what the market is demanding and the type of houses that are being built and where they're being built sort of required us to change our production to meet the demand of our customer base and that's sort of it in a nutshell.

Thanks, Mike. I was thinking it was coming out of the - using the veneer 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 import.

Thanks, Reuben.

Thanks, Reuben.

Your next question comes from the line of Jonathan Hall from Portland Engineering. Your line is open.

Thank you for taking my questions this morning. I was wondering what has been a greater impact on the - on a 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 say landowners or is it more a challenge on the distribution side which is a greater influence do you think?

Jon this is a Nate Jorgensen. I guess I would - in terms of what we're seeing on pricing it's - I think ultimately the marketplace working. We're obviously seeing a very strong demand environment that continues to accelerate. And again part of that demand is single family housing starts which consume more housing starts which consume more material, framing material than a traditional multifamily start. So I think that that's an important equation today. In terms of access to logs, I don't think that's a limiting factor across the system, it's really the converting capacity that exists across much of the manufacturing. As we talked a little bit about just the some of the impact of COVID in terms of staffing and some of the disruption that's happening across our system and among other systems, continues to be part of the equation. I think it has improved here over the past maybe 30 days but still is representative of what we're having to manage through on a day in and day out basis. I think the other component is in terms of manufacturing, there's a lot of input materials that are part of that. And the supply chains across many products and services are very stressed. And some of that is based on logistics. But there are other factors as well. So in some respects, the almost the lowest common denominator in terms of what the capacity is, and I would say that production has been probably the primary challenge in terms of the kind of the distribution, whether it's wholesale distribution or on the on the retail side. Again, I think the business remains active. But in terms of their ability to support the marketplace, I don't see that as a significant issue. So I think much of it is centered around manufacturing and again, given all the challenges that are associated with that.

And let's see, another quote I'm kind of asking this next question on behalf of a friend of mine. With the - I guess on more on the raw material side with the price of logs. If those - if the supply of logs is constrained, like how much is the change in price of logs affecting you guys? And if it is kind of a shortage in those raw materials, are there and kind of plans or kind of mitigating the risks from landowners and log prices starting to skyrocket significantly or maybe not really much of an issue?

Yes, Jonathan. I guess I'd answer your question like this. So different geographies have different challenges, specifically as it relates to log pricing. I'm gathering, I'm not sure where you're from, but I'm gathering that you probably understand this already.

I'm actually - I live in White City. I'm right across from one of your facilities here. And it looks like there's plenty of logs in there in the yards. So that that's my main reason for asking. It looks like…

Okay.

Yes. I hear about shortages and I'm looking across the street, going, it looks like a lot of logs in there.

Okay, cool. All right. So, my first comment is not relevant to your location but in the Southeastern United States, there are many articles that have been written recently around the abundance of log supply and that will be like that probably for decade or more. As it relates to the Pacific Northwest and your backyard so to speak, log pricing has started to go up. You are correct. And we're out in the market buying logs every day. More recently and I'll say in the last 30 or 60 days maybe, pricing has become elevated. Again, more specifically in certain geographies. So in the area you're specifically talking about that has inched up some, but in other parts of Oregon, it has escalated significantly more. Our philosophy has always been that we will buy in the market both logs to be delivered now or this year. But we also buy what we call timber under contract which we can harvest over a number of years depending on the details of that particular purchase. So we're not having an issue today buying lots. But they are getting more expensive and more so in some locations rather than others. But log supply in and of itself today is not a major issue behind us being able to produce what we want to produce.

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

Yes. For sure. Thank you.

Thanks, Jonathan.

Your next question comes from the line of John Babcock from Bank of America. Your line is open.

First of all I just want to congratulations everyone on the strong results for the quarter and also to Wayne in on his retirement. So then I guess I just started out with the first question here. I was wondering if you're worried at all about housing affordability's impact on demand over the next one to two quarters or pent-up demand is too large for this to be an issue?

Hi, John. It's Nate Jorgensen. I think on affordability I think that is something we were watching this as we look at across many communities' markets across a lot of different price points in terms of the type of home. Obviously, prices are accelerating and things that have been helpful I think in terms of affordability things like interest rates are something that we're monitoring and managing closely. But I think in terms of affordability today, the marketplace seems to be taken that in scribe as I look at, again, some of the public builders in terms of what they've been able to accomplish on growing their backlogs, expanding their margins. It continues to look, at least short term, like the marketplace is prepared to kind of take on those higher prices. But affordability is something we're watching carefully. And obviously at certain parts of the marketplace that may push people to the sidelines. And if so, that would potentially have an impact on the overall marketplace. But today affordability is something we're watching and - but doesn't seem to be materializing in the marketplace at least today.

Yes, understood. And then next, has your cost to serve gone up given the market tightness in wood? And if so, would that add cost burden on your P&L?

Yes, John. It's Mike. If you think about the log supply and other raw material supply, we buy some lumber, obviously, that goes into some of our product. Yes. There has certainly been some increased pressure on our profitability from raw material input. I think you probably heard the answer I just gave to the gentleman previously about log pricing. So I would say in the southeast essentially flat. In the Pacific Northwest, depending on location, it has increased, low-single-digit sort of on average across the Pacific Northwest. And the cost of the lumber that goes into our glulam facility as well as our solid-sawn flange I-joist facility in Canada, obviously, we're at the mercy of the market when it comes to those, so that has been quite an impact of the market when it comes to those, so that has been quite a quite an impact. So when you put that role there all together, yes, it has had an impact on our profitability, but compared to the run up in commodities and the increase in EWP pricing, it really hasn't been a major, major impact on our overall profitability thus far. We'll see where logs go in the future, of course.

Okay. I think part of that -

One of the…

Question was - go ahead.

I was going to say, John, one other point I would add is certainly we talked about scarcity of transportation and challenges with getting wheels under product, if you will. Certainly there's some cost escalation going on in transportation because of that. But generally speaking, we passed - we pass that through, so that hasn't had a large impact on us, but it is certainly causing stress in the system.

Got you. Yes. I think like the other part of the question was also related to the manufacturing side, just I mean I assume the mills are running pretty full out, which typically would say you'd improve cost absorption. But I was just wondering given some of the stresses these days, if you're seeing any sort of cost on the manufacturing side that might be going out that, absent some of these other transportation raw material cost increases?

Not really, John. I mean, we have other raw materials that I didn't mention. So I think that most people would realize that things like - our resin cost is increasing. Okay, it's not gone through the roof. But again, if you think about an overall cost structure, it is increasing, but it's not drama - not a dramatic increase thus far, in certain locations, it would be like the so and so on flange facility we have in Canada. But on the average, across our manufacturing locations, our cost structure has inched up somewhat but not dramatically when you think about it those increases relative to the pricing of the products that we're producing.

Okay, thanks for that. And then just last question I had. I was just wondering what Boise Cascade is doing across plywood and EWP, including the veneer from an operating stance, keep up with demand. I know you provided a little bit of color in this earlier, but if you could just kind of go through that, that would be helpful.

Yes, sure. So, yes, over the last decade or so, I guess I'd say we've spent quite a lot of money both acquiring and revamping our existing facilities. And so where we are today, somewhere between 90% and 95% self-sufficient in veneer supply. We do buy veneer on the outside and that has been impacted somewhat because of a number of issues. One is, there was a particular supplier in the Southern United States that had a fire, impacted us as well as other EWP manufacturers. And there is some belief and I can't quantify this, that some of the veneer that would normally be available to EWP is going into plywood because the return on plywood these days is so high. What we're doing, continuing to do is sort of what I indicated earlier. We last year as an example, we finished another dry rebuild in one of our veneer facilities or plywood facilities in the Southeastern United States. We continue on to try and debottleneck a number of different machine centers that were involved in veneer production. And we're always continuously on the look for opportunities to avail ourselves of more stress-rated veneer that's in the marketplace. Unfortunately, there's just not a lot of it at the moment, John. So, that's really probably the principal issue that we'll continue to address as we move through this year and probably into the following year.

Okay. Thanks for all the help and thus far the same quarter as well.

Thanks, John.

Thanks, John.

Your next question comes from the line of Kurt Yinger from D.A. Davidson. Your line is open.

Yes. Thanks for taking my follow-up. Kelly just quickly in your prepared remarks you touched on I think 35% sequential improvement in plywood realizations. Was that an average quarter date number or kind of on a more spot basis?

So, what I quoted therefore you Kurt was our realizations thus far in the second quarter are about 35% above our first quarter average. So, our first quarter average was $556 million and so I was just trying to give you some color on where we're at thus far in second quarter compared to first quarter average.

Okay. That's great. Thanks. And then on the BMD side. I mean, with − what I suspect will be some seasonal improvements in volume and obviously the continued inflationary trend in commodity prices at least through early May here. Is there any reason to think that gross margins can at least approximate the Q1 level if not looked more like Q3 of last year?

Kurt its Nate. I think as you look at on the commodity side that to your point obviously is accelerating. And when you look at the commodity profitability and margins and then compare that to obviously what we're experiencing in the general line, and I think the momentum in BMD should be strong again consistent with that product mix and continuing what we're seeing on price realization. But Kelly let me maybe I'd ask you to provide a little more color on that if you could.

Yes. No, that's a good question, Kurt. And I would say it's hard, yes, certainly prices remain strong and certainly commodity prices have ticked up as we move into the second quarter here. But from my perspective, it would be hard for us to perceive hitting the gross margins that we did in third quarter of 2020. It was - you may recall from the commodity price charge that was a scenario where it was straight up for a number of weeks as we - where we started the third quarter to where we ended the third quarter. So I would not steer you towards the 16.4% gross margin we had in the third quarter of 2020.

Okay, okay. That's fair. Thanks for that. And then just my last one on capital allocation. So you ended the quarter a little over $450 million of cash and you'll probably add to that over the next couple of months here. Can you just remind us what you would kind of consider a comfortable level of cash to hold on the balance sheet and how that might be affecting how you're thinking about the timing of the supplemental dividend or returning cash to shareholders generally?

Yes, sure, Kurt. I'll take that one for starters. So we had another great discussion with our board of directors yesterday in terms of how we think about capital allocation and then maybe just to remind the audience kind of how we think about it, it's - we, first and foremost, want to invest in the asset base we have and we put out the range of $90 million to $100 million currently. And then we're very committed to our quarterly dividend. And we announced another $0.10 quarterly dividend yesterday, and so then once we get beyond that, it's about looking to grow the company in a prudent and thoughtful manner whether that's organic or whether that's through M&A opportunities. And so, as we think about that, Kurt, we're always trying to manage what's potentially in the pipeline for organic growth or M&A compared to what our cash balances are? And as we've said in the past if our anticipated uses in the near-term are less than what we think available to us in terms of the cash on the balance sheet then we will look to return cash to shareholders and we have mechanisms to do that. And so maybe then to back up to your original part of your question, what do we normally think about carrying? We've got leverage targets out there that we are certainly below today and then we would in a normal environment carry something like $150 million of cash we were above that at the present time. But we're continually just trying to evaluate what's ahead of us and what's appropriate to keep for potential opportunities versus do we have access that we should return to shareholders.

Okay. Well, I appreciate all the color there Kelly and thanks for taking my follow-up guys.

You bet. Thanks, Kurt.

Thanks, Kurt.

Next question comes from the line of George Staphos from Bank of America. Your line is open.

Good morning. I just want to follow-up with a separate question, I had to jump off when Q&A started and congratulations everybody as well and most importantly to Wayne. Thanks for everything Wayne in the past. Not a fair question perhaps but how long do you think the lumber markets and the panel markets broadly and keep at the current operating stances and rates with margins as high as they are. When do you think if you had to gauge or if you were in our seats, what would you look for to see that there might be some more meaningful supplier response relative to what's currently a terrific supply demand balance for the producers? Maybe, if that's not somewhere you want to go, is there any way to equate what you're seeing in this cycle? I recognize the prices are records, but equate what you're seeing in this cycle relative to say, 2005, and 2006. Late 1990s. Anyway, you know you could give us something by which we could calibrate over the next couple of years to look at how supply might respond and what we should be expecting. Thanks again and have a good quarter.

Yes. Thanks, George. It's Nate. Let me - I'll take a stab at that. I think in terms of where we're at from a historic perspective, I think if you look at the current lumber and I think more specifically the panel index today, today's numbers are twice what the historic level was prior. So we are kind of beyond even what was even fathomed not long ago. So I think in terms of people kind of reacting to the current marketplace. I think you know for us and I suspect others people are just trying to get the right level of context around what is likely going forward. And what we try to do, George is continue just to go back to the fundamentals. What is the demand equation look like? What are our expectations going forward on a long-term basis given that in terms of capacity and other decisions, those are not measured in quarters but years? So we'll continue to look through the lens of what's consistent with our strategy and what we want to grow and what we want to support, but also look at the longer-term demographics and certainly the pandemics had some positive influences on that. But I think in terms of us kind of overreacting to the current marketplace, given its historic levels, that's not like - something we're going to do. We'll continue to be very guarded and very thoughtful on what is the long-term demand equation look like, how do we think about our share, how do we think about our position relative to our services and capabilities. And then again, we'll kind of go from there. So I'm not sure if that's completely helpful for you, George, but again, ultimately, I think today's pricing, today's realizations like commodities are stunning [ph]. And - but in terms of our planning assumptions as we look longer term, we're both - I think we're looking through the lens of more historical pricing as compared to what we're experiencing today.

No Nate, I mean obviously there's no answer and so we look [ph] as challenge in trying to answer the question. No, that was very helpful and especially the commentary about looking at longer term and being disciplined on supply/demand. I'll leave it there. Thanks again, and we'll talk to you soon.

Thanks, George.

We have one more from Jonathan Hall of Portland Engineering. Your line is open.

Just I had some more questions just listening to some of the previous and I think maybe, Kurt, you already touched on this but for the distribution side of things, could you say –was the bigger challenges kind of the manufacturing capabilities or was it the transportation? I think the example you said was like wheels under product kind of as the example?

Jon, this is Jeff. I will tell you that it was tough to get material produced with all the raw material supplies and everything that we're short. But it was equally tough to get wheels on these materials and move it, so both of them were very difficult to work your way through.

Okay yes, thank you. And the next one is kind of what I've been hearing in - that's been affecting a lot of companies is the labor market shortage. I don't know if you guys experienced anything with that, just having trouble trying to hire people. Are you desperate for operators or engineers? Or are you looking to hire more people internally or maybe hire contractors so to say?

Yes, Jonathan this is Mike. I think it would be fair to say not only for Boise Cascade, but maybe more generally in the employment market that there are significant challenges in getting enough people to come to work all day, every day. Yes, it's geographic to some degree and maybe more industry-specific in certain locations, but we consistently have open positions. And we're doing our best to try and fill them. And that's really independent of where they - you might call them hourly paid positions or salaried positions. It's a pretty challenging labor market at the moment. And so, we're always looking to bring more people on sort of increase our bench strength. And I think like many I have said already. There is a significant level of turnover depending on the geography. You asked about contractors. And I'm guessing you're aware of this. We use contractors in pretty much every one of our locations for specific items when they need it. Whether they happen to be engineering or construction related. And so yes, we use both, both internal and contracted-related supply as and when needed. But it is a bit of a challenge for sure in certain locations.

Okay, thank you. Also just kind of from my earlier questions you mentioned that you had seen the cost of raw materials in the Northwest go up. Can you comment as to how much you have seen those costs been affected lately by wildfires? Because it seems like just everybody over in the Northwest now is just like - well it's June, when are they going to start. And it usually just - it does hurt the logging industry around here quite a bit. And just like how do you see that affect Boise Cascade?

I guess I'd answer your question like this. Yes, fires affect everybody including Boise Cascade and obviously the communities close to where the fires occur. Sometimes not always depending on where the fires are that can result in a short-term increase in availability as I'm sure you're aware of, because some of those locations need to be harvested reasonably quickly to take advantage of the available fiber. It doesn't always happen that way because of various issues that I won't go into. But as it relates specifically to Boise Cascade, I can't really tell you it wouldn't be appropriate to give you numbers on specifically what the changes are in our cost structure. Other than to say that on occasions it helps us because there is availability of raw material that is unexpected. But as a general long-term trend, fires are not a good thing for our industry. I mean, that's ultimately a reduction in total supply. And that is - that makes it more problematic for us. And I think I'll probably leave it at that.

Okay yes, no that's fair. Thank you. I did have one more but it's - I don't think it's - I don't want to take up too much more of your guys' time.

Yes, thank you, Jonathan.

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. And I feel incredibly good about the current state of the company. And I think we've done a really good job through this succession process of also having the right people on the right chairs. And so if I think about the business going forward, I'm part of the reason I'm leaving is I feel exceedingly comfortable about where we are from the balance sheet, mix of business and frankly, the leadership of the company. And again, I just want to express my personal thanks to the team that's covered us. It's been a great group to work with and appreciate all the non-deal roadshows and conferences, and paying attention on calls like this and helping us get our story out. It's been much appreciated and all the best to all of you.

Thank you, Wayne.

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

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.