Boise Cascade Co (BCC) 2015 Q3 法說會逐字稿

Good morning. My name is Amanda and I will be your conference facilitator today. At this time I would like to welcome everyone to Boise Cascade's third-quarter 2015 conference call. (Operator Instructions)

Before we begin, I would like to remind you that this call may contain forward-looking statements about the Company's future business prospects and anticipated financial performance. These statements are not guarantees of future performance, and the Company undertakes no duty to update them.

Although these statements reflect management's expectations today, they are subject to a number of business risks and uncertainties. Actual results may differ materially from those expressed or implied in this call. For a discussion of the factors that may cause actual results to differ from the results anticipated, please refer to Boise Cascade's recent filings with the SEC.

It is now my pleasure to introduce you to Wayne Rancourt, Executive Vice President, CFO, and Treasurer, Boise Cascade. Mr. Rancourt, you may begin your conference.

Thank you, Amanda. Good morning, everyone. I would like to welcome you to Boise Cascade's third-quarter 2015 earnings call and business update. Joining me on today's call are Tom Corrick, our CEO; Dan Hutchinson, head of our Wood Products operations; and Nick Stokes, head of our Building Materials Distribution operations.

Turning to slide 2, I'd point out the information regarding our forward-looking statements. The appendix of the presentation includes reconciliations from our GAAP net income to EBITDA.

Now I will turn the call over to Tom Corrick.

Thanks, Wayne. Good morning, everyone. Thanks for joining us today on our earnings call.

I'm on slide 3. Our third-quarter sales of $992 million were up 1% from the same quarter last year as a result of higher sales volumes, most of which was offset by the impact of lower prices for many of the commodity wood products that we manufacture and distribute. Our net income was down 32%, principally due to lower plywood and lumber prices in our Wood Products manufacturing business.

Our Building Materials Distribution business reported a good quarter despite headwinds from product price deflation. The BMD performance demonstrates the earnings potential of the business as US housing and the general economy continue to strengthen.

We continue to make good progress on our accelerated strategic capital program. We worked through the startup issues on the new dryer in Chester, South Carolina, and saw progressively better production performance at that mill during the quarter. During a nine-day curtailment at our Elgin, Oregon, mill in early September we completed the log utilization modernization and expect to see the benefits of that project beginning in the fourth quarter. The modernization of our Florien, Louisiana, plywood operations remains on schedule for completion late -- or mid next year.

We purchased 547,826 of our shares in the third quarter for $17.6 million. We expect to continue to use opportunistic share repurchases to deploy capital and increase shareholder value. The timing and amount of repurchases will be balanced against potential acquisition opportunities.

With falling commodity prices this year and changes in capital market conditions, we believe the acquisition environment has improved for strategic players such as ourselves that have liquidity and balance sheet capacity. I will have Wayne cover the financial results in more detail, and then I will come back with a few more comments on the outlook before we take your questions.

Thank you, Tom. Turning to slide 4, Wood Products third-quarter sales, including sales to our Building Materials Distribution segment, were $341 million, down 4% compared with last year's third quarter. The decrease in sales was driven primarily by 16% lower plywood prices and 13% lower lumber prices, offset in part by higher laminated veneer lumber and plywood sales volumes.

Wood Products reported third-quarter EBITDA of $32.9 million, down $18.4 million from the prior-year quarter. The decline in EBITDA compared to the year-ago quarter was due primarily to lower plywood and lumber prices, which together represented a negative sales price variance of $25.3 million compared to the prior-year quarter.

Sequentially, Wood Products EBITDA declined only $1.1 million despite an $8.2 million negative price variance on plywood sales. The negative plywood price variance was largely offset by lower log costs, higher LVL sales volumes, and higher I-joist prices.

BMD sales in the quarter were $799 million, up 3% from the year-ago quarter. Volumes in BMD were up 8% and price deflation was 5%.

BMD generated EBITDA of $25.8 million during the quarter, which was up 10% from the $23.5 million reported in third-quarter 2014. The increase in EBITDA was driven by higher gross margin dollars of $3.1 million, offset partially by increased selling and distribution expenses of $1.1 million.

The corporate segment reported negative EBITDA of $4.2 million in the quarter, down from the $5.8 million reported in third-quarter 2014. Corporate costs were lower primarily due to lower incentive compensation costs.

Turning to slide 5, our third-quarter plywood sales volumes in Wood Products were up 16 million feet or 4% from the same period a year ago. The $282 average net sales price for plywood was down $53 from last year's third quarter and $20 lower than second quarter of this year.

Much like we saw in the third quarter, the upcoming comparison to last year's strong fourth-quarter plywood pricing will be very difficult. The North American industry operating rate has been negatively impacted this year by increased imports of plywood from South America driven by the relative strength of the US dollar. As we start the fourth quarter, plywood pricing is about 5% below the third-quarter averages as reported by Random Lengths.

We have taken market-related production curtailment at our Wood Products plywood operations in Louisiana and South Carolina this month in response to the declines we have seen in end-product prices. We will continue to closely watch market conditions as we move through the balance of the quarter and adjust our production to demand levels.

Turning to slide 6, our third-quarter sales volumes for LVL and I-joists were up 5% and 1%, respectively, compared with the year-ago quarter. LVL pricing was essentially flat, while I-joist sales price realizations improved 2% from the year-ago quarter.

Last year's third quarter saw heavy EWP sales volume activity as purchasers accelerated purchases in response to an announced price increase. We haven't seen any unusual supply chain behavior this year, so we do not currently anticipate the same magnitude of fall-off in EWP sales volumes in the fourth quarter as we experienced in 2014.

Moving to slide 7, BMD's third-quarter sales were $799 million, up 3% from the year ago quarter. By product area, BMD sales of commodity products decreased 2%, general line products increased 8%, and EWP increased 7%. The gross margin percentage for BMD was flat with last year's third quarter and up about a half a point from the second quarter this year.

On slide 8 we have set out the key elements of our working capital. Company net working capital excluding tax items and accrued interest decreased $8.1 million during the third quarter. BMD's inventories declined by $20 million during the quarter as seasonal product sales volumes increased, as would be expected. This was partially offset by a $9 million increase in Wood Products inventories.

Accounts payable declined in the quarter, as a portion of the extended terms on selected products we distribute came due in the third quarter. BMD has additional extended term payables that will be paid in early November. As a reminder, the statistical information is filed as Exhibit 99.2 to our 8-K, and it has the receivables inventory and accounts payable data broken down by segment for those that are interested in more detail.

I'm now on slide 9. Our cash balance increased by $17.9 million in third quarter, and we ended the quarter with total available liquidity of $505 million. As Tom mentioned, we repurchased $17.6 million of stock in the third quarter and we expect to continue to deploy our cash for either acquisitions or additional share repurchases going forward.

In the quarter, our effective tax rate was 36.5%. At this point we would expect our book tax rate for 2015 to be in the range of 36% to 38%.

Tom, I will turn it back over to you.

Thanks, Wayne. The current consensus estimate of 1.13 million for 2015 US housing starts is slightly above our original planning level of 1.1 million starts. Housing demand has strengthened over the past several months after a slower-than-expected start to the year. We continue to believe the demographics in the US will support a return to a normalized housing start level of 1.4 million to 1.5 million.

With that in mind we are managing our businesses assuming a favorable backdrop of increasing general economic activity, improving employment, and accelerating new residential construction levels. Our priorities remain to focus on operational excellence while pursuing organic and strategic growth. We want to grow organically and pursue acquisitions that we believe will provide a favorable return to our shareholders.

Additional share repurchases are another avenue we expect to use to deploy excess cash and create value for our investors. Effective capital deployment remains at the forefront among our senior leadership team and our Board of Directors.

In closing, we are making good progress on a number of fronts and believe the economic and housing recovery will provide additional opportunities as we close out the fourth quarter and transition into 2016. Thank you again for joining us on our call this morning.

We would welcome any questions at this time. Amanda, would you please open the phone lines?

(Operator Instructions) James Armstrong, Vertical Research.

Good morning. Thanks for taking my question. The first question I have is, given that you're running both production and distribution, what are you seeing in terms of inventory in the Wood Products as we go into the winter season?

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

And this is --

Go ahead.

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

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

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

Okay. Then lastly, on acquisitions, where are you seeing the most opportunity? Is it in Building Materials or Building Distribution or Wood Products? And where in the supply chain are you seeing the most opportunities?

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

Okay. That helps. Thank you very much.

Ketan Mamtora, BMO Capital Markets.

Good morning, Wayne, Tom. First question on the Distribution business. Can you talk about what drove the margins in this quarter, especially when we saw commodity pricing really falling this quarter?

Ketan, this is Nick Stokes. The margin specifically was driven by increased volumes of those products that carry higher margin -- the general line, EWP -- and that have the service component to it. Certainly the market pricing environment for wood commodities was not favorable.

It wasn't terrible; it wasn't favorable. Steel pricing continues to be very challenging. But it was a mix issue driven primarily by increased levels, seasonally appropriate, of general line and EWP.

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

Yes, I would tell you that two things happen. I would remind everybody that the third quarter is generally the best quarter that BMD has in terms of overall sales volumes as demand -- certainly as builders try to finish up projects, get them framed up for the winter.

So you're staring at a seasonal volume impact as well as just the mix. Some of the products like composite decking that we sell a lot of, they don't install as many of those in the winter as they do the summer.

Understood. Switching gears to -- on the Wood Products side, lumber pricing that you reported was a little better than what we were expecting. The Random Lengths ponderosa pine index also fell quite sharply, but you guys seem to have done a little better.

Was there some sort of a lag in this quarter? Or was it your business mix was a little different? Can you just help us reconcile that a little bit?

I think there probably is a bit of a business mix there. I think as you've seen, though, we did see significant reduction in price; and we tend to trend with those indexes over time.

Understood. Thank you very much. I'll turn it over.

George Staphos, Bank of America Merrill Lynch. (Operator Instructions) Alex Ovshey, Goldman Sachs.

Thank you; morning, guys. A couple ones for you. So these imports from Brazil, do you have a sense of the magnitude that they can get to over time?

Yes, Alex; this is Wayne. I think the issue for Brazil is really going to be where they are going to direct it. If you look at the 2015 year-to-date numbers the exports from Brazil, about 16% are headed to the US. So obviously they could shift more volume in the direction of the US if currencies made that make sense.

Just to give you a little background, if you look at that compared to 2014, shipments out of Brazil to Germany have dropped from 16% to 15%. Belgium has dropped 2 percentage points. Italy is down 1 percentage point. Holland is down 1%. UK is down 1%.

If you look at that, the stuff headed to Europe is down 6%, and some other minor shifts. And the US is up 8%, from around 8% in 2014 to currently running about 16% of the exports from Brazil.

As Tom Corrick mentioned, we really haven't seen much of a meaningful increase second quarter to third quarter. September had relatively high imports at 23 million cubic feet; but that was down from the 28 million that we saw at the high point in June.

So we're really watching it month by month and adjusting our production to fit with demand.

That's helpful. What if you went back to 2004, 2005? Was most of Brazilian production exported to the US in that time frame? So over the last 10 years they've really diversified their customer base to include a much more diverse set of countries; would that be fair?

Yes, I think it's fair to say that the last four or five years the amount that's come into the US has been quite low, certainly compared to 2005 and 2006. Part of what was going on in 2005, 2006 is you had incredibly high US housing starts. We were at 2 million starts, which was well above historic trends, and builders in the supply chain were basically scrambling to find panels, whether it was from plywood, OSB, or imports.

I don't think we have that situation today. So I'm not nearly as concerned that they will elevate back to the levels that occurred a decade ago.

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

Okay. That's helpful. On M&A, can you say a little bit more about the properties that are available and what business lines? What is the potential range in terms of size of targets that are out there?

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

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

Well, I think on the distribution side -- and again, we have a large national footprint today, so as we look at acquisitions in distribution that will involve also looking at adjacent businesses. On the distribution side, we continue to see a lot of acquisition activity with the people that are involved in one-step roofing.

US LBM continues to make acquisitions. Obviously, Probuild and Builders FirstSource came together through M&A. We expect Stock and BMC West or BMC to close later this year. So there continues to be a fair amount of activity in distribution.

On the manufacturing side, we believe -- and again it remains to be seen -- but we believe that with the lower commodity prices and the disruptions in the capital markets, that that will create opportunities over the next six to 12 months.

Got it; okay. And just on share buyback, two quick ones. Have you done anything quarter-to-date in the fourth calendar quarter?

And why not do more in the previous quarter? I mean, the stock really came off materially. I think we can argue potentially it was even trading below where some of these M&A comps you talked about; maybe even below where you purchased the Chester/Moncure assets, if you were to use that same plywood price that was employed at that point.

Why weren't you more aggressive on share buyback in the quarter?

Well, again, we are balancing share buybacks on what we see for activity levels, on potential M&A, and other uses for capital. Then the other part that you have to keep in mind is we can't trade when we are in possession of material nonpublic information, whether that's around earnings or M&A and other activities. I would tell you that as a Company, we're relatively careful on that.

So unless we utilize a trading plan, you should probably anticipate that we're going to consider ourselves blacked out from an earnings standpoint from early in the third month of any quarter.

Okay. I have to say, does that mean you haven't done anything quarter-to-date in the fourth quarter?

Correct.

Great. Thank you very much, guys. Appreciate it.

(Operator Instructions) Steve Chercover, D.A. Davidson.

Thank you. Good morning, everyone. Wayne, you said a couple of times that your downtime is predicated on matching supply to demand; and that's great. Can you remind us some of the more intricate calculus involved?

I think it's cost of capital as opposed to cash returns. But I would assume that you were still earning appropriate returns, so it's more on the supply and demand at this stage.

Yes, I mean without getting into too much of the science, we are very focused on generating an appropriate return on capital. And we don't think that's accomplished in this industry if we run to cash breakeven. We think you've got to look at what the order files are, where we're seeing demand, and keep an appropriate level of supply and an appropriate time on order files in front of us.

So generally if we're out two to three weeks on order files, there's a pretty good balance in the market. If order files get extended longer than that, it doesn't necessarily work well for us or our customers.

And certainly if we're trying to sell wood that's being manufactured in the current week, that's not constructive from our standpoint. So we really do try to look at the demand side and balance our order files to two to three weeks; and we think that's constructive both for buyers and sellers. And we're not interested in running till we get to cash breakeven on a variable cost basis.

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

No. We came into this year at 1.1 million; and if you asked us to give you our best guess for 2016 at this point, we're planning around 1.250 million and still planning on the multifamily component of that being somewhere in the 38% range.

As you know, the single-family component is the one that really drives the majority of the consumption on wood products. Multi-starts use about a third of the products that would go into a single-family start.

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

Yes, that's still the highest priority. That's where we think we can add the most in terms of synergies, whether it's freight or sales and marketing or administration.

So our strong preference would be to do something in the veneer-based business, and a lot of the assets are in family hands or in the hands of strategics. There's not a lot of assets that we're interested in that are sitting in the hands of private equity.

So it really is timing and opportunity, and we're trying to maintain a balance sheet that gives us the flexibility to execute on a fairly short horizon. Because in a lot of cases these are driven by family situations that are pretty dynamic, and we want to be able to respond to those quickly.

You've always been consistent there. Just final question, the debottlenecking that you're doing down at Florien and elsewhere, how much capacity might that add in 2016?

Basically, Steve, I made a -- when I was talking in my comments I said midyear; that's actually the time the dryer will start up there. Our related projects will start up later in the year. So the final startup of everything in the mill will be close to the end of the year.

The incremental veneer capacity that will come out of that is about 100 million feet. But our focus, I think as we've mentioned previously, is that -- our plans are to focus that veneer on the EWP business. Our intention is not to see that in the form of EWP business as the EWP or as housing markets continue to grow; and our focus is not on producing additional plywood with that veneer.

Great. Okay. Thank you both.

George Staphos, Bank of America Merrill Lynch.

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

Yes, John; this is Wayne. I think on the EWP side our estimate is that the industry is probably operating somewhere in the 75% range, low 70%s.

On the panel side, a year ago I would've said we were probably operating as an industry in the low 90%s. I think today it's probably in the mid-80%s, maybe 84%. And the difference is the import activity.

Okay.

On the pine lumber side, that has been fairly weak because the people that typically cut dimension have shifted in a couple of cases over to cutting pine lumber that impacts the markets we're in. Then in the fourth quarter, we are anticipating that, because of the forest fires in the West, that there will be a fair amount of pine logs that become available and there may be an oversupply situation on inbound logs, which will obviously help on log costs but may encourage more product to get produced in the fourth quarter and first quarter as people try to get that cut before it deteriorates.

So we're a little cautious on our pine lumber business over the next couple quarters.

Okay; sounds good. And with regards to, I think you talked earlier about some curtailments at the two mills. Is that predominantly on the plywood side, I'm guessing, then?

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

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

I'll talk to the new residential, let Wayne speak to the repair and remodel activity. I think that if we're at 1.250 million, the industry will be reasonably well positioned to respond to that. If you look at housing starts for the last six months, they've actually been averaging over 100,000 starts a month; so clearly the industry has demonstrated the capability to fill that order demand.

So I would think that at least in the places where we're playing, that will be absorbed as we get towards 1.3 million. If that actually happened, I think that would start to become pretty challenging.

On the repair and remodel side, the activity has been pretty good this year if you look at the big-box same-store numbers. The encouraging thing is the Joint Center for Housing Studies of Harvard just published their view on 2016, and they're expecting remodel activity to be up 6.8% in the second quarter of 2016. So a pretty good year in 2016, if they're right, compared to 2015.

I think where we'll really see the influence on that is in Nick's business and on the plywood side, if that comes to fruition.

Okay, great; thanks for that. Then just lastly, could you talk about veneer prices and ultimately how that's moved throughout the quarter, since we don't have a lot of clarity on that front?

Veneer pricing, it's generally trended up. In the summers it always does, and it's trending down now.

We don't buy a lot of veneer on the outside. We do buy some on the West Coast, and we don't sell very much.

Okay. Is that -- where do the levels stand right now relative to where they ended the quarter?

Down slightly.

Okay. All right, great. Thanks for your help, guys.

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

Okay. Thank you, everyone, for joining us. Appreciate your time. If you have any questions we'll be around for follow-up.

Amanda, thanks for your help, and we will talk to everyone after year-end. Have a great day.

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