Boise Cascade Company (BCC) Q4 2021 Earnings Report, Transcript and Summary

Good morning. My name is Kevin, and I will be your conference facilitator today. At this time, I would like to welcome everyone Boise Cascade's Fourth 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] 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 from those expressed or implied in this call. For a discussion of the factors that may cause the actual results to differ from the results anticipated, please refer to Boise Cascade's recent filings with the SEC. It is now my pleasure to introduce you to Kelly Hibbs, Senior Vice President, CFO and Treasurer of Boise Cascade. Mr. Hibbs, you may begin your conference.

Thanks Kevin and good morning everyone. I would like to welcome you to Boise Cascade's fourth 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; and Jeff Strom, Head of our Building Materials Distribution operations. 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 on our earnings call today. I want to start off by expressing my appreciation for the tireless work of our associates. While the uncertainty experienced in the last year has presented us with many challenges, I'm proud of our associates and their unwavering focus on supporting each other and our vendor and customer partners. I'm now in Slide number 3. Our fourth quarter sales of $1.8 billion were up 21% from fourth quarter 2020. Our net income of $169.1 million, or $4.26 per share, compared to net income of $26 million, or $0.66 per share in the year ago quarter. As further described in our earnings release, fourth quarter 2020 results included non-cash items related to the termination of our qualified defined benefit pension plan that negatively effected earnings by $1.10 per share. In fourth quarter 2021, total U.S. housing starts increased 6% year-over-year. Multifamily starts drove the increase as single-family housing decreased 5% compared to the prior year quarter. Irrespective of the headline starts data, the pace of activity in the fourth quarter was unseasonably strong. Housing fundamentals finished the year on firm footing with total U.S. housing starts and permits at approximately 1.7 million and 1.8 million units respectively on a seasonally adjusted basis in the fourth quarter. Our Wood Products manufacturing business reported segment income of $98.4 million in the fourth quarter compared to $40.8 million in the year ago quarter. Wood Products benefited from improved EWP sales realizations compared to the last year's fourth quarter. Wood Products continue to focus on manufacturing production levels in response to continued strong end product demand for EWP during the quarter. Our Building Materials Distribution business reported segment income of $138 million on sales of $1.6 billion for the fourth quarter compared to $67.1 million of segment income on sales of $1.3 billion in a comparative prior year quarter. BMD results were favorably impacted by steady increase in commodity prices during the quarter as well as continued strengthen in our EWP and general line products. Kelly will walk through the financial results in more detail and I'll come back and provide our outlook before we take your questions. Kelly?

Thank you, Nate. I'm on Slide 4. Wood Products sales in the fourth quarter, including sales to our distribution segment, were $446.6 million compared to $358.7 million in fourth quarter 2020. As Nate mentioned, Wood Products reported segment income of $98.4 million in the fourth quarter compared to $40.8 million in the prior year quarter. Reported EBITDA for the business was $112.2 million, up from EBITDA of $54.5 million reported in the year ago quarter. The increase in segment income was due primarily to higher EWP sales prices offset partially by higher wood fiber and other manufacturing costs. BMD sales in the quarter were $1.6 billion, up 24% from fourth quarter 2020. Sales prices and sales volumes increased 19% and 5% respectively. The business reported segment income of $138 million and EBITDA of $144.2 million in the fourth quarter. This compares to segment income of $67.1 million and EBITDA of $72.9 million in the prior year quarter. The improvement in segment income was driven by a gross margin increase of $94.1 million resulting from improved gross margins across all product lines. The margin improvement was offset partially by increased selling and distribution expenses of $22 million. The amounts for unallocated corporate costs and other items impacting our reported adjusted EBITDA can be found in the tables of our earnings release. The net of those items was negative $8.5 million in fourth quarter 2021 compared with negative $14.3 million in fourth quarter 2020. The decrease was due to a non-cash pension settlement charge of $6.2 million in fourth quarter 2020 related to the elimination of our qualified pension plan. Turning to Slide 5. Our fourth quarter sales volumes for LVL were up 6% while sales volumes of I-joists were down 3% compared with fourth quarter 2020. Transportation constraints have hindered our ability to consistently move finished goods inventory into the marketplace. Demand for EWP continue to be strong and our order files remain extended. Pricing in fourth quarter for both I-joists and LVL were up 16% compared with third quarter 2021 as previously announced price increases continue to take effect and certain temporary price protection arrangements expired. We expect the low single-digit sequential price increases in first quarter 2022. Turning to Slide 6. Our fourth quarter plywood sales volumes in Wood Products was 304 million feet compared to 305 million feet in fourth quarter 2020. Current plywood volumes aligned with our continued work to optimize veneer into EWP production. The $401 per thousand average plywood net sales price in fourth quarter was down 1% from fourth quarter 2020. Plywood pricing stabilized during the quarter after the sharp price declines experienced in third quarter. However, as we enter 2022, plywood pricing has rebounded sharply, order files have extended and transportation related constraints are limiting OSB supply further contributing to demand for plywood. First quarter 2022 pricing thus far is approximately 60% above fourth quarter 2021 average price realizations. Moving to Slide 7, BMD's fourth quarter sales were $1.6 billion, up 24% from fourth quarter 2020. By product line, commodity sales increased 9%, general line product sales increased 26% and EWP increased 62%. Gross margin dollars generated improved by $94.1 million in fourth quarter compared with the same quarter last year, resulting from improved gross margins across all product lines. The gross margin percentage for BMD was 16.2%, up 320 basis points from the 13% reported in the fourth quarter 2020. BMD's EBITDA margin was 8.8% for the quarter, up from 5.5% reported in the year ago quarter. The trajectory of commodity products pricing will continue to influence BMD's financial results as we move through 2022. However, EWP and general line products have historically experienced limited price volatility and we expect the firm pricing environment across those products lines to continue in 2022. I'm now on Slide 8. This slide makes obvious the substantial volatility in lumber pricings we've experienced over the last six quarters. On Slide 9, one can see similar pricing patterns for the Random Lengths composite panel index. As we enter 2022, commodity lumber and panel pricing continues to be well above historical averages as strong demand and capacity constraints continue to create supply and demand imbalances in the marketplace. We expect future commodity product pricing to be volatile with ongoing challenges with transportation and labor having a meaningful influence on supply side uncertainties. On Slide 10, we have set out the key elements of our working capital. Networking capital, excluding cash, income tax items and accrued interest increased $48.2 million during the fourth quarter. Accounts receivable and accounts payable decreased with a modest seasonal deceleration of sales and purchases. Consistent with our historical patterns, we expect working capital increases to use cash in the first quarter of 2022. The statistical information filed as Exhibit 99.2 to our 8-K has the receivables, inventory and accounts payable data broken down by segment for those interested in the detail. I'm now on Slide 11. We finished fourth quarter with $749 million of cash. Our total available liquidity at December 31st was approximately $1.1 billion, which reflects our cash and availability under our committed bank line. We had $445 million of outstanding debt at December 31, 2021. We expect capital expenditures in 2022 to total approximately $110 million to $130 million. Availability of engineering and construction resources and timing and availability of equipment purchases is expected to have an influence on 2022 spending. In addition, capital spending could also increase or decrease as a result of a number of factors including acquisitions, efforts to further accelerate organic growth, exercise of lease purchase options, our financial results and future economic conditions. Our effective tax rate is expected to be between 25% and 27% with the potential that ongoing federal legislation activity could increase future tax rates. And I'm pleased to note that we returned $214 million of cash to our shareholders through regular and supplemental dividends during 2021, successfully completed the log utilization center project at our Florien veneer and plywood plant, started up our Houston door assembly operation, expanded our distribution capabilities in the Nashville market, and also recently announced additional capacity within our BMD network that Nate will speak to shortly. We remain well positioned with sufficient cash and reserve to remain focused on the execution of our strategies, including future organic and acquisition growth opportunities. 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. The demand environment for new residential construction continues to be favorable, supported by mortgage rate levels, continuation of work-from-home practices by many, and demographics in the U.S., which we expect to continue in 2022. The February Blue Chip consensus for U.S. housing starts as 1.6 million for 2022 and 1.56 million for 2023. In addition, limited new and existing home inventory availability and the age of U.S. housing stock will continue to provide a favorable backdrop for residential construction and repair and remodel spending. Although we believe that the U.S. – the current U.S. demographics support the level of forecasted housing starts and many national homebuilders are reporting strong near-term backlogs, labor shortages and supply induced constraints on residential construction activity may continue to extend build times and limit activity. In addition, the pace of residential construction and repair and remodeling activity may be affected by the economic impact of the cost of building materials and construction, housing affordability, mortgage interest rates, wage growth, prospective homebuyers access to financing and consumer confidence as well as other factors. In Wood Products, we continue to enjoy strong demand and pricing momentum for EWP. We also recently announced a price increase on EWP products that we expect to begin to see the benefit of the back half of 2022. Capital projects will continue to focus on veneer production and support of our EWP growth. In BMD, our 2022 capital spending includes the build out and startup of our recently announced organic expansion projects in Marion, Ohio, Walton, Kentucky, and Lakeville, Minnesota. We're anxious to add capacities in these geographies along with our suppliers to deliver a deeper and broader line of products for our customers. We expect continued firm pricing in our EWP and general line product categories and are prepared and fully capable to capture the opportunities and mitigate the risk associated with expected price volatility and commodity products. Regarding the environmental, social and governance reporting, Boise Cascade is a strong heritage as an ethical and responsible company. Long-term relationships truly matter to us and people count on us do the right thing. We work with purpose to bring people, products and services together to build strong homes, businesses and communities that stand the test of time. Our core values of integrity, safety, respect and pursuit of excellence, shape how we conduct business and are the foundation of our ESG journey. When it comes to social and environmental responsibility, both our values and purpose are at the heart of what our associates do every day in our communities where we operate. Environmental stewardship is an integral component of our heritage. We are committed to implementing and achieving sustainable practice through our manufacturing and distribution business processes. Encouraging the use of Wood Products, which are made from a renewable resource and store carbon as a cost effective building choice gives us the opportunity to respond to effects of climate change. I invite you to go to our website to learn more about our sustainability commitments across the ESG spectrum. Lastly, I want to, again, express my gratitude to our associates, the driving force behind our outstanding results in Q4. We will continue to make sure we use our operating and financial strength of the benefit of our customers, suppliers, communities and shareholders. Our balance sheet remains well positioned and gives us the ability to continue our pursuit of further organic or M&A growth opportunities. Thank you for joining us on our call today and your continued support and interest. We would welcome any questions at this time. Kevin, would you please open the phone lines.

[Operator Instructions] Our first question comes from Mark Wilde with Bank of Montreal.

Good morning.

Good morning.

I wondered Nate and Kelly…

Good morning, Mark.

Good morning. Hi, Kelly. I thought that maybe Wayne took the punch bowl when he retired, but I guess not.

Well, I'm sure Wayne is listening in. So, hello, Wayne.

I want to start on EWP. First of all, can you give us some sense of what the order backlogs look like in EWP, whether you're on allocation?

Yes, sure. Sure. It's Mike here. Excuse me and good morning. Yes. Our order files are still very, very strong. We continue to be on allocation as I know you're aware and have been for the last 18 months to two years. And I would suspect given the situation we're experiencing with demand that that will continue probably at least through the remainder of 2022. So I think it's a very good position as it relates to EWP demand situation going forward.

Okay. And is it possible just on the price side in EWP to just help us think about the cadence over the next four quarters relative to kind of price increases that you have out in the market right now?

Yes.

I heard you say low single-digits Kelly in the first quarter, but it sounds like there may be more when we get into back half of the year from these recent announcements.

Yes. That's fair, Mark. And so, yes, I guided to low single-digits for the sequential quarter coming up in the first quarter. I would also say the same for the second quarter of 2022 compared to the first quarter 2022. And then as Nate referenced and I would say that that will largely get us through the previously announced price increases that we've had in 2020 and 2021. And then as Nate referenced, we and others in the marketplace recently announced an additional price increase. We don't expect to start to see the benefit of that until third quarter at the earliest of 2022. And that will probably take three to five quarters before we start to see that in our net price realizations in Wood Products.

Okay. And just in ballpark terms approximately what's that increase look like?

So what was announced was a range of 15% to 30% and that's – but that's going to vary by product and by region. So my guidance would be towards the low end of that range, Mark, and then it will filter in overtime.

Okay.

Hi, Mark. It's Nate. Maybe -- Mark, it's Nate. Just one other maybe comment on that. It's – the announcement was pretty recent. And so, we're still in the early stages of getting that kind of rolled out and communicated. So there may be some variability to that. We'll have again more clarity to as that – as we move forward, but I think as Kelly described, there is a bit of a range out there today. And, again, as we get that that firmly locked into place, we'll have a better view of that here as we move forward.

Okay. And is it possible to give us a little color on what you can do to grow organically in engineered wood? I – yes, the veneer capacity is a part of that, but also what you might be able to do from an M&A perspective or with – whether you would do anything from an M&A perspective in engineered wood?

Yes, sure. I’ll take a stab at that. So, yes. Obviously we continue to look at the internal veneer production alternatives. So that would be we have a capital project this year at our Chester plywood mill to replace an old dryer. New dryers, veneers dryers obviously will give us more efficiency and a slight increase in output. We have a couple of more of those that we can do in different locations across our system. So they take time and right at the moment, particularly with the availability of equipment that takes longer than we would normally anticipate, but we will be doing those. As it relates to other alternatives. We continue to look as we have done now for a number of years to see whether there are attractive alternatives in terms of M&A opportunities, obviously right at the moment with the way the market is performing in general. It’s difficult to locate one of those that, that we’d be able to execute on, but we are certainly looking, we are always looking to follow that particular avenue. And I’ve been asked previously about whether we would greenfield like an additional veneer producing facility. Again at the moment it’s not the ability to finance it. It’s more an ability to actually be able to execute on anything in that particular area. The timelines are very long. So, I’m not saying we would never do it, but it would be very difficult to execute in the near future.

Okay. Right. And then Nate, I wondered just, as we look at kind of how strong the fourth quarter finished, and this kind of Jack rapid start that we’ve had here to the first quarter. How do you unpack the elements of that? Is this just demand strength? Is it a different approach to kind of year-end inventory management by some of your customers? And what role do these transportation issues play in yesterday? One of the big OSP producers mentioned that they’ve had to shut down some of their Western Canadian operations, because of transportation issues, which has to be painful to do at current OSB prices?

Yes. A good – really good question, Mark. I think, to me, as I had a chance to kind of reflect on the fourth quarter, and really 2021 and what we’re experiencing so far in 2022, it really, I try to come back to the basics, which is okay, what does the demand environment look like? And the demand environment has been steady and consistent. Single family, multifamily, really across all price points, all geographies repair and remodel has been strong and steady as well. So on the demand side of the equation it has, there really was no seasonal disruption, if you will, in terms of what took place. And then as you described that the other side of that is supply. And then what we’ve experienced on the supply side is challenges. To your point, logistics have been a significant issue, and parts of our system, especially up in Canada in the rail system that you described as Ben Wall [ph], I think publicized, but trucking and such remain a challenge as well. The other component on the supply is simply production, whether it’s our production, whether it’s raw materials coming into our production or finished goods that we distribute out of BMD. COVID was a real challenge, as we closed out the year and started this year. So in terms of that supply consistency and predictability, that’s been a challenge, Mark as well. And so when you kind of put together that steady, strong, consistent demand signal, including I think optimism from the building community, as we head into the deeper 2022, and you look at some of the supply disruption and in some cases, chaos with logistics, to me that has kind of created the momentum and the energy that’s in the marketplace today. And again, we feel good about where the fundamentals are, but at some point we expect some of the supply related issues, especially that are COVID and maybe weather related will obviously improve – we expect to improve as we move forward.

Okay. All right. That’s good. I appreciate it. Last question for me. I mean, historically Nate, the price of EWP has been pretty stable in the move that we’re – we saw last year and it sounds like the move we may see a little later this year are really, unprecedented in my history in the industry. Can you talk a little bit about your ability to hold on to these better prices going forward?

Yes. Good question, Mark. And you’re right. It is, I would say a bit unprecedented in terms of what the industry is generally experienced relative to pricing it’s pricing has been stable and obviously over the last year or two, the pricing has certainly increased. For me, what has changed is, maybe something, again, the ability to have limited impact on the supply side, in part given raw materials. But also the very strong demand environment that we’re experiencing today. And as I look at an environment where allocation as Mike described has been with us now for almost two years, and we expect it to be stay tensioned up, moving forward, that’s created and obviously a pricing environment that we haven’t seen in many, many years. My view is the other, component is, is that, when you look at EWP, it has to compete with other materials. And so as you look at items like for example, lumber, or in some cases, steel, EWP, although prices have increased, it still remains very competitive relative to the other alternatives that are out there in the marketplace. So, you’re right. We’re kind of unprecedented territory here, but I think for me, as long as things remain tensioned up in terms of supply and demand, I feel good about our ability to maintain these kind of pricing levels moving forward.

Okay. Very good. Thanks, Nate. I’ll turn it over.

Thanks, Mark.

Our next question comes from George Staphos with Bank of America.

Hey guys, good morning. Congratulations on the performance. And good luck coming up in the 1Q. Market on a lot of the themes that I wanted to hit on, but maybe to piggyback first. On veneer, what do you think you can do in terms of capacity growth this year and into next year without adding greenfield capacity? And if you actually wanted to build greenfield capacity, how long would it take? Are we talking about 2025, 2026? That’s what we’re hearing in terms of some of the lead times on saw milling equipment anyway at this juncture. So, how would you have us think about that to start?

Yes. Hi, George. It’s Mike.

Hey Mike.

Yes. So let me try to answer the first part first. During this year, I think this is sort of the way I see it rolling out. First we certainly need to get over the issue as it relates to the COVID situation, because even if we had all the veneer that we would like to obtain, we don’t have the people at the moment. So your guess is as good as mine, but let’s say if we get through the remainder of the winter into spring and summer, and sort of COVID, I’ll say won’t disappear, but if it the impacts are much reduced. Then we will look at obviously needing more veneer. That is really the issue for everybody, I believe in our particular sector there is no more available stress-rated veneer. And with elevated plywood prices some independent producers of veneer probably see that as equally attractive or more attractive than supplying stress-rated veneer to people like us, companies like us.

Okay.

So, I think very generally speaking our output for the 2022 year will be quite similar to what we produced in 2021 with the only caveat being that it might not be the same proportions in terms of our two principle product lines of LVL and I-joist, okay.

So Mike recognizing it’s easy for us to say, because we’re analysts and you guys actually run companies, if you wave the Wuhan and COVID was gone, what would you actually be able to sort of add on a name plate base in terms of the near capacity, recognizing it’s unrealistic, but just to have some sort of frame of reference.

So if I interpret your question is, how much fair capacity do we have in our system if we had all the veneer that were available? Is that, would you like…

Yes. And as you’re adding the drying capacity, like you’re doing in Chester and elsewhere.

Yes. Okay. So the dryers that we’re adding, that will have a marginal increase, very, very small relative to the machine center capacity. Generally speaking, George, if we had all the people that we would like to have and all the veneer that we need to maximize our throughput in every machine center that we have, I think we could probably produce low-to-mid single-digits in terms of additional volume. Without adding any additional machine centers. Okay. Because if we had more machine centers, we could produce more. Okay.

Got it. And then recognizing, you’re not going ahead with this just yet. If this, you decided after this phone call, it was time to at greenfield capacity, what are we talking about in terms of lead times 2025, 2026, 2024?

Yes. So, if we were to build a facility that generated veneer, so veneer production facility, which would need to be an integrated plywood plant as well to use the non stress-rated veneer, generally speaking, those sort of projects in a non-COVID environment can be done in around about two years.

Two years?

Yes. Two years unfortunately with the COVID situation and the supply chain challenges, I think that’s more like twice that link. So three, not less than three and probably four years.

Understood. I appreciate all the thoughts on that. One more question for me, and I’ll turn it over, recognizing, this is going to be sort of up there with world peace or the cure for the common cold, because everything relies on earnings pricing, your own stock price, all which are, can be volatile. How do you see capital allocation and the mix of it sort of flexing this year versus last year, obviously more CapEx. But how should we think about that? Any sort of preliminary views on 2023, which I know is really a long ways out and on value return to the shareholder again, any thoughts on how the mix might adjust and flex based on what you’re seeing in the market? Thanks.

Yes. Good question, George. So I would say our strategy is still very much the same in terms of how we think about it. And first and foremost, we’re going to invest in our self and our associates. So, we do have the expanded capital program that we’ve referenced that Mike spoke to a few of those projects, and Nate also spoke to some of the additional things we’re doing in BMD. So, we’re going to expand that program somewhat. We’re going to continue to be acquisitive and try to grow the company in a disciplined and thoughtful way. And then, obviously we’re going to have a regular cadence of conversation with our Board of Directors to the extent that the M&A environment doesn’t prove through, then we’ll figure out how do we best return to the cash to the shareholders. And as we’ve talked, that could be share repurchases or that could be supplemental dividends. And so we’ll – the cadence of the conversation and how we think about it is very consistent with the past, George.

Okay, Kelly, appreciate it. I’ll turn it over.

You bet.

Our next question comes from Susan Maklari with Goldman Sachs.

Thank you. Good morning, everyone. It’s nice to join you today and congrats on a good quarter.

Morning, Sue.

Good morning. My first question is, I appreciate that you outlined some of those initiatives that you have in BMD coming up for the year. Can you help us to perhaps further quantify the sort of expansion that, that will actually translate into either into sort of revenues or volumes or anything along those lines. And then I guess with that, as you do think about that, that capacity expansion coming in, what does it mean in terms of the operating expenses, and just sort of the cost of running that business, any changes that we should be aware or thinking of their?

Yes, so let me give you a little bit of insight on the cost of the capital programs that we have that are included in our range that we gave you. And then I’ll let Jeff speak a little bit in terms of what these expansion give to us, and we do have existing footprints in these markets and so how about that. But in terms of the cost, we’ve talked about Walden, Kentucky, for example, so that that’s a brownfield that we spent roughly $15 million in the first – fourth quarter, and we’ve got another $2 million to $3 million to go to build that out and get that ready to go. In Marion, we, we have a facility there, a really good team, but we’re somewhat constrained by a lease facility that we have right now that is not ideal. And so that’s a greenfield. We bought a piece of property and we probably have $10 million to spend to get that stood up, and get it Boise, if you will, to be able to operate that like we want to. And then in Lakeville, Minnesota we had the opportunity, there’s a 10 acre to 12 acre piece of property directly adjacent to our existing operation there that we’re going to spend $4 million to $5 million to again, expand our opportunities there in products and services. And so I’ll let maybe then Jeff, give you a little more color on how we think about what we can do with those expansions, Jeff?

Hey, Susan, is Jeff. I just tell you, I’ll just go through each one of these individual that we have on the Nashville relocation we’ve done, it’s a significant opportunity for Nashville, and we’re already starting to see some of they moved in there. The Houston doors shop, which is up and running, that will take some time and door shops always do, but it, again, it’s a very significant opportunity for us. Walden, Kentucky, we should be in there later this year, much bigger footprint. It’s going to open up some geographies for us that we have a tough time getting to. So pretty excited about that. Minneapolis is already significantly location for us, but it will open up more opportunity in there. And then Marion will be a great build out and will really help. And I would tell you for each one of these locations individually, it’s a significant opportunity to increase what they do. But I also tell you, when you put it up against the totality of BMD, it’s still kind of smallish numbers. So, if you’re just looking for it to stand on the total number you won’t see it so much.

Got it. Okay. That’s very helpful color. And then my other question is, when we do think about the relative pricing that we’ve seen for OSB and plywood coming into the year. Is that differential in there, and the fact that that’s kind of shifted from where it was historically driving any implication for the volume side. And also, I guess, has there been any shifts that you’ve seen in terms of imports, and what that has meant in terms of volumes and demand for domestic plywood?

Yes. So, I’ll take that too. In terms of the equation on plywood volume for us with this strong pricing environment as you’re aware the way we’re hung together in terms of trying to maximize our veneer and EWP production, that story is very much the same for us. So our plywood volumes will be consistent with what we’ve historically reported. But yes, we are getting a very nice price lift from the lack of OSB. And in some case is plywood is actually cheaper than OSB, which is certainly not the normal. In terms of imports, a year ago, I think it was something like 1.1 billion plus of square feet that of plywood that came in from Brazil into the U.S. And that was similar to the prior year, it’s pretty lumpy in terms of how it comes in. And that can be impacted at times by can – by container availability, and probably some of the same labor production challenges we experience. But there is no reason for us to believe that that will slow down. We expect a similar or increasing amount of plywood imports to keep coming and landing on the U.S., especially given the pricing environment that we have today.

Got it. Okay. My last question is, appreciating that you don’t have perhaps as much exposure on the DIY side, as some others do, but it does feel like within the pricing dynamics we’ve seen, it’s been that consumer, that DIY consumer that tends to sort of drive the incremental volume that has implications for pricing. When you look out and you think about that part of the market, can you talk about what you’re seeing there? Is there anything that you are hearing from any of those customers or anything in the field that has changed or perhaps suggested that consumer and their appetite for lumber is any different at these pricing levels than it was, say a couple months ago or last summer, anything like that?

Sue, it’s Nate Jorgensen. Yes, really good question, on the do it yourself, audience and what does that look like? And again to your point, given the experience maybe we had as an industry last summer there is, maybe some hesitation that can build at certain price points. What we’ve experienced so far in terms of the kind of the velocity on our repair and remodel business has been consistent and strong. And so we monitor that closely, at obviously our location level in terms of product mix because that does vary a little bit across our system, but that that’s another data point for us. And obviously we’ve got a relationship on the plywood side that we can see, consumption on a more real time basis. So, we are watching that carefully and closely, and looking at some of the things that would perhaps impact, the demand for the consumer. And obviously we’ll make adjustments as appropriate, but at this point in time, we’re seeing really good consistency and takeaway from that segment of the market.

Okay. That’s very helpful. Thank you all. And good luck.

Thanks, Sue.

Our next question comes from Kurt Yinger with D. A. Davidson.

Great, thanks and good morning, everyone. Just two quick ones on BMD from me. I guess first, are there any signs of material availability in the general line categories improving there? And my guess is no, but are you doing anything different in terms of commodity inventory positioning or anything in the current environment?

Hey Kurt, this is Jeff Strom. I’ll start with the general line. And we – in general line EWP and doors, I’ll put them all together. There really has been no change in the managed supply on that. And in fact, in certain instances, I’ll tell you, we’re seeing some of what’s available decreasing a little bit because of some of the production problems that are out there. So the challenge is still there completely, as far as inventory on the commodities, that’s, we’re at some levels right now that the risk reward, really comes into play. And so we’re absolutely looking at that all the time. We’re looking at what we have on the ground. We’re looking at what we have bought and rolling, and trying to position our self and one thing we know about the commodity market at some point it’s going to correct and we want to be in the right position when it does.

Got it. Okay. That’s helpful. And Jeff, maybe just sticking with you for the second one, maybe just talk a little bit about the factors driving the upside to gross margins on general line and EWP, is that really pricing driven or any other kind of significant buckets within that? And then how do you think about the sustainability of that, I guess, in light of the current demand environment?

Well, it is the pricing has been driven by, the demand has been very, very strong supply is obviously tensioned up, and, when you get those kind of factors going on, you’re able to extract maximum value out of it. And so the pricing really has driven it as far as being able to sustain it, talking to our vendors and working with them closely with the customers, demand looks like it’s going to be solved for extended periods of time, and when we talk to our vendor partners, it doesn’t look like we’re going to see relief in their opinion until late Q3, possibly early Q4. And so the tension is going to stay there as long as demand stays, the same pricing will continue in our opinion to stay strong and possibly even move up a little bit.

Yes. So Kurt, I would add a little bit, I mean, the inflationary environment that we’ve experienced now, for some period of time, it certainly stands out, in BMDs results and you can see it. And we, and as we guided, if you will, in terms of some of the color we gave in our comments, we, the first quarter, and probably the first half, we expect to be quite strong, all else being equal. But we also need to recognize, where the commodity price environment is, and the exposure we have and others in the market have, and could be some hesitancy, as where the price levels are and when, and if the transportation issue starts to solve it. So there are mills with a lot of product waiting to be shipped, and how does that impact and influence the commodity price environment? And as, we have exposure there and we’re prepared and able and capable to deal with that. But third quarter 2021 is not that far in the rear view mirror. And so we do have, we do have exposure there. And so and maybe where you were trying to go is, do we think the long term, what’s your long term trend EBITDA margin look like? I think it’s really hard to give you a finer point on that, given the extraordinary conditions that we’ve experienced over the last six or so quarters.

Right. Okay. That’s fair. All right, well, appreciate all the color and good luck here in the remainder Q1 guys.

Thanks, Kurt.

Next question comes from Reuben Garner with Benchmark.

Thank you. Good morning, everybody.

Good morning, Reuben.

Let’s see. So, I wanted to ask some questions on the BMD side of the business. So the last two years, the gross margin profile of the business has been a, plus or minus 14%. I think historically it was more in the, I don’t know, 11.5 to 12.5 range. Can you help us kind of parse out what your gross margins have looked like or how they’ve trended for the different kind of subsets within the business? So, we can try to adjust for the pricing environment and see what maybe the new normal gross margin profile is for the business overall?

Yes. So let me, I guess, try to take it by then of the three categories we speak to commodity general line and EWP. So commodity as you’re well aware of Reuben, certainly we get gross margin percentage expansion in an upward sloping environment, and we get the opposite of that in a downward sloping environment. So, we’ve had the roller coaster on both sides of that equation here, in the last several quarters. And so, we got a nice lift as we exited 2021, and we’re getting a very nice lift here as we start 2022. General line and EWP, we can kind of put in a similar bucket because, as a distributor, when price increases are announced, we’re able to push those through the market pretty quickly. And so we see a nice bump in terms of per gross margin percentage expansion when those price increases announcement and are announced because we can push them through. So, we get that. And then we do get the EBITDA margin benefits from that as well that fall to the bottom line, even when those prices do stabilize. So the value of inventory on the ground increases pretty quickly when you have those announced price increases. Nate, would you add any color on that?

Yes, and I think the, the key for me Reuben is, in an environment that we’ve experienced, like I said, the last number of quarters here is pricing has been going higher across general line and EWP and that space that’s a really good spot for BMD, because they get the benefit of that and continue did kind of build their margin profile as we, as that flattens out, then obviously the storyboard changes a little bit, there is some leverage, but ultimately, the lack of pricing movement will be, that will show up within the BMD margins as well. So again, I think we feel good about what’s in front of us here for 2022 given what’s been announced both on EWP and general line. And then obviously as Kelly described, we’ll, you know, we’ll be managing and monitoring the situation closely on commodities to make sure that we obviously take full advantage of the upside, but manage our risk on the downside as well.

So just to be clear, I mean, are the margin that you’re seeing in the general line and EWP, I don’t know if you’ve ever disclosed what those look like on the gross line, but let’s say they’re, I don’t know, 20% in this environment are those are going to maybe return to a more normalized level once we stop kind of have this rampant period of inflation or has there been, I guess, leverage and now the 20% or whatever number that is, is that the new kind of baseline for that part of the business?

Yes. Reuben it’s Nate again. And I would say, there’s going to be, anytime there’s a price in environment, you have an opportunity to make adjustments and hang on some of those adjustments on a long term basis. But clearly, some of the momentum that we’ve experienced in BMD on margins is a result of the pricing action on general line and EWP. And that pricing action remains prices going up then BMD will continue to get the tailwind with that as pricing, realization as a flatten out, that will also, again, kind of reduce BMD margins as compared to an environment where pricing is moving up. So, I think we’ll see some lift, in a new normal in terms of the higher prices. But ultimately BMD, the benefits, the clear benefits they’ve received are part of the price increases on general line EWP and obviously the momentum we experienced fourth quarter as well as year-to-date on commodities.

Okay, great. And then another question on BMD, just want to make sure I understand this correctly. So if we are in an environment kind of, as we move through 2022 and into 2023, where maybe the commodity prices start to roll over to some new normal and, the rest of the business flattens out, how are the – how would that impact your SG&A, or your selling, and distribution expenses? Are those going to, I guess, could we see, the absolute dollars come down there or are those less so tied to the pricing side of that business?

I would say those, those are going to be more so tied to the volumes, that come in and out, and then transportation, we and everyone else are experiencing some higher costs there just given the dearth of supply. But I wouldn’t tag into the pricing environment. It’d be more volume and supply chain inputs on transportation.

Okay, perfect. Thanks guys. Congrats on the end of the year and good luck on the new 2022 outlook.

Thanks, Reuben.

Our next question comes from Mark Wilde of Bank of Montreal.

Thanks, Nate. I wanted to come back just, and talk about labor a little bit. Can you talk with us about sort of labor costs on both sides of the business, as well as labor availability and what kind of turnover rates you’re seeing?

Yes. Good question, Mark. I think in terms of, maybe start with labor availability, I think like many in the business committee work, we’re experiencing challenges relative to labor and staffing. And as we think about, our company and what we want to get accomplished, obviously our team, is really a huge part of what we do. So getting our labor footprint right, has been continues to be a challenge again, like I think many companies are experiencing. And that’s certainly an area of focus for us as an organization. Part of that is to make sure we are a great organization and have the ability to not only attract talent, but retain talent. And so to your point, we’ve seen some, succession in terms of retirements and movement, but I would say largely, I think it’s consistent with what our others are experiencing in a very, kind of tight labor market. In terms of cost labor costs continue to move higher. And as we think about, competitiveness, as well as some of the things that we’ve done in support of our organization, whether it’s around you know compensation incentives, some different things that we’ve done to recognize the incredible work that our organization has delivered over the past year. That’s certainly been part of our cost structure in 2021. And, and there’s certainly a likelihood that some of those trends will continue into 2022. So as I think about, kind of the risks and challenges, there’s been a number of them over the last couple of years, but having a stable, consistent aligned organization is really kind of top of mind for me. And part of that is just associated with the stamina, of all the different challenges that are out there, not just at work, but at home and making sure, again, we create the, again, the right environment, the right experience to not only, keep our talent, but to bring new talent in as well.

Okay. Just a couple of other ones on labor. Nate, what’s been the effect of sort of all of this kind of turnover and challenges and getting labor. What do you think the effect of that has been on productivity across Boise Cascade?

Yes, I think, in terms of, productivity, when you have new people and new roles or maybe experienced people and new accountabilities there’s a learning curve associated with that. But I think in terms of productivity and what we’ve been able to get done over the past year, I feel really good about what we’ve accomplished as an organization. In some respects that the challenges, our teams spaces just literally daily uncertainty of staffing, and part driven by COVID. So in terms of the productivity and performance and the results, I feel very good about where we’re at. And but that’s been a daily conversation, a daily challenge across our organization. I would say that, when it comes to things that are really, really important things like onboarding new associates and bringing, making sure they’ve got a good access and visibility to who we are, our culture, our norms, our expectation, our values, that’s harder to do from a distance. And so when you have, working, in some of the environments that we have, especially here at headquarters, that could be a, maybe a difficult or different challenge than we’ve experienced in the past. So for us market, it is something, we think about out, we talk about routinely and making sure that we stay incredibly well connected to our organization, especially as they’re taking on new roles and accountabilities that’s an important part of where we’re at today and obviously the things that we need to do going forward as an organization.

Okay. And then the last one on this, Nate, I guess all of us who, what Boise Cascade launch the industry, we know that this is not always an easy sector to kind of recruit talent to recruit and retain. So, I’m just curious in general terms, what might you be doing right now to share some of the benefits of this windfall with the long-term employees beyond, just kind of share ownership at Boise Cascade.

Yes. Mark, we’ve done a couple things, we’ve put in place, obviously we’ve got our legacy kind of programs around, bonuses and that we’re excited about, what that will mean here soon in terms of payout performance. We’ve done a couple of, kind of one off we’ve described them as supplemental bonuses again, to recognize the performance of the organization we’ve done that as well, but I think to your point on terms of how do you, kind of recruit maybe into this industry which at times, has not been viewed as the best place to be. I think it’s a, we as a company and an industry have unbelievable story to tell, especially around ESG and the impact that someone can have coming into our organization in terms of helping build homes, repair, remodel. I mean, that is a to me, an important opportunity to contribute to the community, and differently than, than perhaps other accountabilities. So for us, as we think about our ESG work and our commitments and what we’re trying to get accomplished on behalf of all of our stakeholders, our associates are part of that conversation, making sure they understand what we’re trying to get accomplished. And again, our ability to retain and recruit talent, I think is somewhat centered around ESG. And so that’s an opportunity that we’re, we’re working as an organization.

Okay. Sounds good. Good luck to the rest of the year guys.

Okay. Thanks.

Our next question comes from George Staphos of Bank of America.

Yes. Hi guys. Two quickies for me to finish up Just recognizing it might be a little bit tough for us to model. We appreciate your help on, what we should be thinking about for OSB costs into the first quarter. The comps are interesting when you look back a year or even versus fourth quarter, but what kind of inflation or benefit might we see there on OSB for flange and then lock costs any thoughts that we should be considering as we’re modeling for 1Q? Thanks and good luck in the quarter.

Sure. I get to answer those too. So let me do the second one first log costs. I think it’s perhaps to say that in the Pacific Northwest and more particularly in our locations in Western Oregon on the coast of Oregon, that log costs have continued to increase quite significantly, even since last December. So the numbers that I looked at the end of January, sort of indicated that we could see log costs, at least in the near future, at least mid teens in terms of percentage. That I won’t go into all the ways and whys, unless, unless somebody wants me to, but in the inland Pacific Northwest, which is sort of our Eastern Oregon and Eastern Washington locations, our log costs, they’re not all of them, but a good part of them are actually tied to finished product pricing on a trailing basis. So actually in the first, first month of the year, they were down relative to the end of last year. So again, very geographically dependent. In the Southeast, in the United States really no difference in Louisiana sort of flat, I would call it where we have, obviously big operation. In our other locations in South Carolina and Alabama, there has been a little bit of an uptick sort of low single digits for the most part. But a lot of those things in the south have had to do with availability due to, weather constraints and the like. So if generally speaking, in the Southeastern United States, I think the expression we use is there is a wall of wood and I don’t think it’s going away anytime soon. So, I don’t see sort of a continued escalation in the south. As it relates to our OSB costs, the way we buy OSB is on a contractual basis with sort of a trailing average. So costs have been significantly, well pricing, excuse me, has been significantly higher for a while, but it did go down and then, and ratchet back up again. So I can’t predict the future on OSB pricing, but I think as we just look in the reasonable near future, our OSB cost will be kind of, sort of similar to where they were on a trailing basis. And, you know, we’ll see how the, how the year goes in terms of the indices and how that impacts our costs as we get through 2022.

Understood. Thanks for that, Mike.

Okay.

And I’m not showing any further questions at this time. I’d like to turn the call back to Nate Jorgensen for closing remarks.

Great. Thank you. We appreciate everyone’s joining us today for the update on Boise Cascade. So we appreciate, your time and interest and support of the company. Please be safe and be well. Thank you.

Ladies and gentlemen, that concludes today’s presentation. You may now disconnect and have a wonderful day.