Boise Cascade Co (BCC) 2020 Q3 法說會逐字稿

Good morning. My name is Chris, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Boise Cascade's Third Quarter 2020 Conference Call. (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 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, Chris. Good morning, everyone. I'd like to welcome you to Boise Cascade's Third 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; and Nick Stokes, Head of our Building Materials Distribution operations.

Turning to Slide 2. I would point out the information regarding our forward-looking statements. The appendix of the presentation includes reconciliations from our GAAP net income to EBITDA and adjusted EBITDA and segment income to segment EBITDA.

I will now turn the call over to Nate.

Thanks, Wayne. Good morning, everyone. Thank you for joining us on our earnings call today. I'm on Slide #3. Our third quarter sales of $1.6 billion were up 25% from the third quarter of 2019. Our net income was $103.2 million or $2.61 per share compared to the net income of $27.2 million or $0.69 per share in the year ago quarter.

Total U.S. housing starts increased 11% compared to the same period last year. Single-family housing starts, the primary driver of our sales volume increased 17%. Given the extraordinary market conditions caused by an ongoing imbalance between industry supply and end product demand for wood-based commodities, both businesses delivered outstanding operating and financial results during the period.

Our Wood Products manufacturing business reported segment income of $66 million in the third quarter compared to $15.6 million in the year ago quarter. Wood Products continue to focus on establishing pre-COVID-19 manufacturing production levels as product demand exceeded supply during the third quarter.

Our Building Materials Distribution business reported segment income of $107.9 million on sales of $1.4 billion for the third quarter compared to $38.7 million of segment income on sales of $1.1 billion in the comparative prior year quarter. BMD sales and income were robust, and our long-term strategy and commitment to consistently carry a broad base of in-stock products supported by high service levels and a solid financial position, continue to deliver value to our vendor and customer partners in the supply chain as well as our shareholders.

Wayne will walk through the financial results in more detail, and then I'll come back to provide our outlook before we take your questions. Wayne?

Thank you, Nate. I'm on Slide 4. Wood Products sales in the third quarter, including sales to our distribution segment were $363.7 million compared to $325.1 million in the third quarter of 2019. As Nate mentioned, Wood Products reported segment income of $66 million in the third quarter compared to $15.6 million in the prior year quarter. Reported EBITDA for the business was $80 million, up from EBITDA of $30.8 million reported in the year ago quarter.

The increase in segment income was due primarily to higher plywood sales prices, offset partially by higher wood fiber costs as well as lower net sales prices of EWP.

In addition, selling and distribution expenses and general and administrative expenses increased $2.0 million and $1.7 million, respectively.

BMD sales in the quarter were $1.4 billion, up 25% from the third quarter of 2019. Sales prices increased 25% with relatively flat sales volumes. The business reported segment income of $107.9 million or EBITDA of $113.6 million in the third quarter. This compares to segment income of $38.7 million and EBITDA of $43.9 million in the prior year quarter.

The increase in segment income was driven by a gross margin increase of $86.7 million, resulting primarily from improved gross margins on commodity products compared with the third quarter of 2019. This margin improvement was offset partially by increased selling and distribution expenses, and general and administrative expenses of $14.3 million and $2.5 million, respectively.

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 $15 million in the third quarter of 2020 compared with $10.7 million in the third quarter of 2019. The increase was due primarily to higher incentive compensation costs and approximately $3.2 million of business interruption losses at Wood Products facilities that were absorbed at corporate in the third quarter as part of our self-insured risk retention program.

Turning to Slide 5. Our third quarter sales volume for I-joists was up 5% and sales volume for our LVL was down 2% compared with the third quarter of 2019. Demand for EWP strengthened through the quarter, and we are seeing strong EWP demand continue into the fourth quarter. Pricing in the third quarter for I-joists and LVL were down 2% and 1%, respectively compared with the second quarter of 2020.

Wood Products announced list price increases for both LVL and I-joists in August. We would expect to see the benefits of the list price increases phase-in over the next several quarters.

Turning to Slide 6. Our third quarter plywood sales volume in Wood Products was 316 million feet compared to 343 million feet in the third quarter of 2019. The lower volume for plywood sales reflects our continued work to optimize veneer into EWP production as well as periodic short-term disruptions related to COVID-19. The $428 average plywood net sales price in the third quarter was up 69% from the third quarter of 2019. Plywood demand and pricing continued to strengthen and reach historic levels during the third quarter. However, industry plywood production effectiveness appears to improve. Imports have increased and the long lead time for orders have subsided as we moved into fourth quarter, which is resulting in pricing retreating from the atypical levels experienced in the third quarter, particularly in the Southern U.S.

On Slide 7, BMD's third quarter sales were $1.4 billion, up 25% from the third quarter of 2019, with prices up 25% and volumes relatively flat. By product area, BMD's commodity sales increased 54%, general line product sales increased 6% and EWP sales increased 6%.

The gross margin percentage for BMD in the third quarter was 16.4%, up 340 basis points from the 13% reported in the third quarter of 2019. The gross margin increase resulted from improved gross margins on commodity products compared to third quarter '19 as well as an increased proportion of sales occurring out of warehouse rather than direct. BMD's EBITDA margin for the quarter was 7.9%, up from the 3.8% reported in the year ago quarter.

Slide 8 shows the sharp rise in lumber pricing in the second and third quarters. Strong demand when coupled with capacity constraints in the third quarter of 2020 created supply demand imbalances in the marketplace and historically high pricing levels for commodity, lumber and panel products.

However, October 2020 composite lumber prices and panel prices have declined by approximately 35% and 10% from the peaks reached in September 2020 and are at risk for further price erosion. Commodity product pricing will continue to be volatile as we move through the fourth quarter and head into winter. Pricing movements from the current levels will likely be determined by the strength of end market consumption and industry operating rates.

On Slide 9, one can see the same pricing pattern for the random lengths composite panel index, which has begun to decline in the fourth quarter as many manufacturers have worked towards restoring their production into near pre-COVID levels. Imports have increased and customer orders are able to be filled in shorter time frames.

Moving to Slide 10. We have set out the key elements of our working capital. Company net working capital, excluding cash, income tax items, accrued interest and dividends payable decreased $44.4 million during the third quarter. Accounts payable and accrued liabilities increased from second quarter due to seasonally higher purchasing activity and higher incentive compensation accruals for 2020. Both businesses reduced inventory during the quarter.

Distribution inventories decreased due to stronger-than-expected demand and higher inventory turns, while manufacturing inventories decreased due to strong end product demand, lower log inventories, and reduced production levels in response to periodic short-term disruptions at many locations due to COVID-19 and hurricanes in the southeastern U.S.

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 that are interested in more detail.

I'm now on Slide 11. We finished third quarter with $504 million of cash. Our total available liquidity at September 30 was approximately $849 million, which reflects our cash and availability under our committed bank line. We had $444 million of outstanding debt at September 30.

During the quarter, we issued $400 million of 10-year notes with a 4.875% interest rate. Proceeds from the offering were used to retire our $350 million of 5.625% notes due 2024 as well as a $45 million secured term loan. In connection with these transactions, we recognized a pretax loss on extinguishment of debt of $14 million during the third quarter of 2020.

In addition, we have announced our intention to terminate our qualified defined benefit pension plan. As part of the planned termination process, during the third quarter, we repurchased 2 BMD locations that were leased from the pension plan for approximately $11 million. The $11 million was recorded as pension contributions in the quarter.

We expect to fully eliminate the liabilities of our pension plan in the fourth quarter of 2020, upon which we will record the related noncash accounting adjustments as required by the application of pension settlement accounting rules. We do not expect any further cash contributions to terminate the pension plan.

In response to the uncertainty of the impacts of COVID-19, we reduced our planned capital spending for 2020 from our previously expected range of $85 million to $95 million to now a revised range of $60 million to $75 million. We expect our capital spending, excluding acquisitions to be approximately $80 million to $90 million in 2021. Our effective book tax rate is expected to be between 25% and 30% going forward.

In light of our higher than targeted cash balance, we are paying a supplemental dividend today of $1.60 per share to our shareholders, which was previously announced. After payment of the supplemental dividend, 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 into 2021.

Our objective remains to successfully grow our business, while generating appropriate returns on shareholder capital.

And with that, I will turn it back over to Nate to discuss our business outlook.

Thanks, Wayne. I'm on Slide #12. While there continues to be a heightened level of economic uncertainty given the pandemic, low mortgage rates, continuation of work from home practices by many in the economy and demographics in the U.S. have created a favorable demand environment for new residential construction which we expect to continue into next year.

Furthermore, with homeowners spending more time at home, repair and remodel spending may continue to strengthen as homeowners invest in existing homes. The blue-chip consensus for U.S. housing starts was last published at an expectation of $1.32 million for 2020. Although we believe that the current U.S. demographics support a higher level of housing starts and many national homebuilders are reporting strong near-term backlogs, the impacts of COVID-19 on residential construction are uncertain.

A reacceleration of COVID-19 cases could prompt state or local officials to reinstitute restrictions that could limit or constrained building activity. Aside from higher OSB input costs into I-joists, we continue to see favorable cost improvements and efficiencies in our manufacturing operations.

Wood Products continues to make an effort to restore production rates to pre-COVID-19 levels in response to strong end product demand, particularly for our EWP business.

As previously announced, we will continue to evaluate plywood market conditions, log supply availability, operating cost, environmental permits and other factors influencing our Elgin plywood operations as we approach 2021.

In the distribution arena, BMD has done a terrific job of executing and responding to market opportunities at both a local and national level. Effectively managing the impacts of commodity price changes will remain at the forefront for our distribution group in the fourth quarter.

As a wholesale distributor, a broad mix of commodity products and a manufacturer of certain commodity products, we have sales and profitability exposure to declines in commodity product prices. With uncertainties in demand and difficulties in judging the appropriate operating rates, commodity Wood Products pricing could be volatile in the months ahead, we'll react appropriately.

As we wrap up our formal comments, I want to express my sincere appreciation for the focus our associates and managers have maintained on safety, taking care of one another and the communities in which we operate as well as our customers and other key relationships. Their performance through the pandemic as well as through the recent hurricanes in Louisiana and the wildfires in the West has simply been inspiring.

We will continue to be guided by our values of safety, integrity, respect and pursuit of excellence. We will successfully get to the other side of this crisis by centering on the health and safety of our associates and making sure we use our operating and financial strength of the benefit of our customers, suppliers, communities and shareholders.

Thank you for joining us today for -- and your continued support and interest in Boise Cascade. We would welcome any questions at this time. Chris, would you please open the phone lines?

(Operator Instructions) Our first question comes from George Staphos with Bank of America.

Congratulations on the progress in the quarter. I guess the first question I had, perhaps for Nick, given the drop that we're seeing in some of the commodity prices, in particular, lumber. And given how general line has -- excuse me, commodity has grown in terms of the overall mix of the business, what do you do differently in terms of managing the working capital risk into the fourth quarter into the first quarter?

And if you had to gauge just a normal sort of level of risk management or heightened risk management relative to past periods, how would you frame it, Nick, for us in terms of how you're managing the business?

George, I think the fundamental backbone of our strategy has been and will continue to be making sure that we have product available for our customers on a daily basis. And there's ongoing reasons in terms of customer service and those kinds of things. And quite frankly, it represents an opportunity in environments like this one. It's got some risk. But if you think about everyone's expectation in terms of declining prices, there is opportunity if you have commodity products on the ground that you can get to your customers tomorrow, you can keep the wood flowing and turning.

So fundamentally, we start with the premise that we want to have product available. We start with the premise of trying to make sure it flows out and flows in every day. And hopefully, the inflow doesn't exceed the outflow. And obviously, you do that with pricing. Certainly, in the broader context, given what we've had in terms of the magnitude of the pricing volatility. As we came into the tail end of the third quarter, we recognize that given extended order files and pretty frisky prices that there was probably a little more risk out there than in normal times, whatever normal means. And so we adjusted the inflow a little bit in terms of that.

Again, we want to make sure we had product for our customers out there.

Understood. So it sounds like more of what you normally do, maybe a little bit of extra emphasis on risk management, just given where price is?

Yes, I think that's a fair way to say it.

Now maybe playing my audience not intentionally so, but what benefit are you -- meaning you guys -- I mean, what benefit do you think you're getting, if at all, from having your own fleet and in general, what sorts of tensions are you seeing right now in terms of logistics costs and freight costs?

And that's a broader question to everybody.

From a -- George, this is Nick again. From a distribution standpoint, we do have our own fleet, but only about half of what we deliver is on our own trucks. The rest of it, we rely on dedicated and contract carriers to do that. And really, from a cost standpoint, there's a little bit of movement back and forth, but it's not significant if you think about the cost of payroll drivers and kind of own versus rent.

Transportation through the third quarter and I'll let Mike talk a little bit about it from the manufacturing side from the mills. But transportation for the third quarter was a challenge. It was scarce, but it wasn't a showstopper, and it wasn't impossible to find trucks and we kind of worked through it pretty well.

Yes, George, this is Mike. I'd reiterate, what Nick said. Obviously, there were some interruptions with the fires in the West and the storms in the Southeast, primarily in Louisiana. But taking it all into account after those things passed, we've had a little bit more challenge in locating trucks on a timely basis, but not dramatically. That's not been our biggest challenge of recent times. And the pricing has been, I'd say, relatively constant. So not a big issue right at the moment.

Okay. My last one, I'll turn it over to you, Mike, on Wood Products, I mean, the gross margin was extraordinary 3Q versus 3Q, congratulations to you and the team, anything that we should remember that perhaps we're forgetting about in terms of comparisons versus last year or anything in particular that went well beyond pricing, obviously, from a manufacturing standpoint, so that you got so much to the bottom line at the gross margin level?

Yes, George, good question. It wasn't just great pricing. As you probably recall from our previous quarterly calls, we took some fairly aggressive steps early on this year to cut back on expenditures, things like our -- obviously, CapEx was one of them, but also on things like how much we were spending on maintenance and our focus on cost control generally. At the end of the day, those things have put us in a very strong position, obviously, in conjunction with outstanding pricing. So we had the best of both worlds, if you want to call it that, very strong pricing and really very, very strong cost control.

(Operator Instructions) Our next question is from

Mark Wilde with Bank of Montreal.

Nate, I think you owe a bunch of people lunch today.

Was that to Nick or to Nate?

To Nate.

Yes, Mark, no question, yes, they're just outstanding performance in the quarter. And while we had a number of, I think, strong tailwinds, the fingerprints of 6,000 associates are absolutely all over those results. So we're grateful for the work and the results that were delivered.

Yes. And it looks like even with the payout of the dividend today, you're essentially net debt free? If my math is correct.

Yes. We were -- Mark, we were trying to be somewhat conservative with the unknowns that are still out there for 2021. And then -- and combining with the $0.10 quarterly dividend, it gets us to an even $2 payout for the year, which we're pretty proud of.

Yes. I guess, Wayne, one question that I have is the impact on the distribution business in the fourth quarter, potential of this rapid correction in lumber prices. What -- how we might think about that rolling through the business? I think we guided some of this with George's question.

Well, I'll let Nick speak to this, but I would tell you from my chair, I think the data we have available this round relative to the data we had available in the second half of '18 is considerably better. And I think the way Nick's guys have visibility into what's going on in pricing, has improved.

And so I think really to Nick's point, at the latter part of August, in early part of September, they really started managing the risk of a rollover. And through October, I think, have done a nice job of managing that. And obviously, November and December have yet to be seen. But I think with panels holding up and at least the way Nick's team has managed the lumber declines through the month of October, I'm feeling better about it than I did in past cycles when we've had sharp sell offs, even though this one has come from a higher point. And I'll let Nick step in. But I think his comment earlier about being in the markets every day and having a really good feel, combined with the data has been very, very helpful over the last 6 to 8 weeks.

Yes, Mark, this is Nick. I would kind of echo Wayne's comments and maybe add a little color. Certainly, we don't expect a 16% margin experience in the fourth quarter. That's well outside our historical range and you're as familiar with what our historical ranges have been as anybody. So I would guide you there a bit.

I think the other thing relative to the current environment is inventories are relatively lean throughout the supply channel. Both at our level, we're lean. I think the lumber yards are lean. I think builders aren't -- quite frankly, builders were delaying a little bit towards the tail end when the high prices were happening.

And everybody is really aspiring to lower inventories. I listened to a couple of calls last week of public companies and heard words like we intend to stay lean. We're going to manage based on sales expectation and we're only going to cover our immediate needs. So I think that's the framework by which everybody is operating. And as long as demand holds up, the flow-through will be really pretty good. And so there's a little bit of buying and selling tail end of last week.

And as I told the Board last week, this is a -- we're in chapter 8 of a 12 chapter book. And I don't know if the hero is going to get shot or he's going to find the gold and get the girl. So we'll see.

Okay. And just kind of related to this. Any sense from where you guys are sitting as to whether the kind of the supply and the inventories can get back to some kind of a normal level as we move through the winter months? Or could we hit next spring building season and still be quite tight? Because it seems like the current level of single-family starts is still quite strong. So it's -- from the outside, it would seem like we may have a hard time catching up through the winter months.

The way I think about it, Mark, is kind of in our 3 product buckets, if you will. From a general line standpoint, many of our key suppliers are on allocation as we speak. And depending on the severity of the winter that will give them a little bit of traction, but if demand holds up, inventories won't be able to build in the off cycle, and we may very well have similar situations come next spring. I think with EWP, I'll let Mike and/or Wayne talk about kind of what we expect there.

In terms of commodity Wood Products, OSB has, so far, held up from a price standpoint and extended order files. The lumber guys, particularly in the south, the order files have eroded and prices have retrenched pretty dramatically. And whether the producers on the lumber side decide to kind of stick with the game plan and build it, I think there's more capacity out there on the lumber side than take advantage of the demand, if you will. So very good question. We're planning to make sure we have adequate inventory and look for opportunities to add to those over the winter cycle, when and where appropriate.

And I guess the last one for me is just on the EWP side. Given the starts numbers that you gave, which were up kind of mid-teens on single-family, should we expect a significant acceleration in your EWP volumes? Or is it a matter of you just being supply-constrained at this point?

Yes, Mark, it's Mike. So I can tell you that we're doing everything we possibly can to produce as much EWP as our infrastructure will allow us. And we have a reasonably extended order file. We went on the allocation word some time ago, and I expect we will be in that position for some time to come. I can't tell you 100% sure when that might end. But I think through the next month or 2, I think that could easily be the case. And of course, it will depend, as you point out, what happens with housing starts through the remainder of this year and into early next year.

I can speak for our attempts to bring on additional staff, not only at our EWP mills, but at our veneer/plywood mills. And we've made some really quite significant progress since the last call we had. But on average, we're operating probably at around 90% of capacity. So we still have more people that we need to bring on and train. So I think they'll be on the EWP side, at least for the reasonable foreseeable future. I think it will be quite challenging with the order files that are there and the housing starts that are continuing to happen day in and day out.

Your next question is from Reuben Garner with Benchmark Company.

Maybe just a follow-up on that engineered wood products question. So to clarify, you're running at 90% capacity in the third quarter. Given the fourth and first quarters are a little weaker from a volume perspective, if I remember correctly. Can we expect that your year-over-year growth rates might have a chance to accelerate given what we've seen in the market? And I guess, kind of a second part of this question is, over the last few years, smaller median home sizes and the location of some of the construction has kind of limited the I-joists opportunity. Are you guys seeing that trend reverse with some of the construction strength in some other markets like the Midwest and Northeast?

Yes, Ruben. So yes, you're right about -- usually Q4 and Q1 have lower demand levels for EWP, just because of the seasonality. I can't -- I'm not very good at predicting the future and particularly not the weather, which has a pretty large impact on what can happen. But given that there's a great preponderance of starts that are occurring in the southeast. If we have good weather and we run well, there is some chance that, particularly the next -- this quarter and the following quarter could be a bit above what we would normally see.

To my point earlier, we're running as hard as we possibly can, and we'll continue to do that no matter what the starts are because we would like to build some more inventory. So if we don't sell it, we'll be putting more inventory on the ground to move into the, what we call, the traditional part of the building season next year.

As it relates to your question about I-joists and what's happening, I think everybody has seen the trends, of course, year-over-year for a number of years now, where I-joists penetration has dropped off somewhat. We're not seeing a change in that at this point in time with the slab on grade and being a significant proportion of the construction, particularly in places like Texas and a somewhat smaller footprint for housing starts, I think there is a bit of pressure on I-joists. But I will tell you, interestingly, and this may be because of the price of lumber that the demand for I-joists at the moment is very strong. And I think that's probably likely to continue for a little while because of the benefits that accrue from using that type of building material.

And Mike, if I could follow-up, the -- what is -- how does this all translate from a pricing perspective? I know you put out an increase in August. Is it possible because you -- and I'm assuming your competitors are pretty tight as well. I mean, could we see maybe more pricing announcements than we normally would for engineered wood products so that you guys are able to invest and increasing your capacity or at least -- yes, I guess, help me walk me through how this compares to a normal kind of environment, if there is such a thing?

Yes, sure. So yes, you are correct, not only Boise Cascade, but other companies in this sector have implemented price increases in the last number of months. I think the question about what the future holds is as much as anything about what happens between now and, let's say, end of Q1, Q2 next year. If the demand is very strong, and I think we all hope it will be, then, of course, whether it's us or the rest of the industry, I think there will be some close attention to whether there's an opportunity for another increase.

As it relates to what that might be and when it might be, I couldn't really say at this point in time. And as you well know, the level of increase is really market specific. It depends on some markets can be more robust than others. Was there -- sorry, was there another bit to your question there, Ruben, that I may have missed?

No, no, that was helpful, Mike. And then last one for me is, I guess, on the commodity pricing side, I guess, a 2-part question. Does -- I think last quarter, Wayne, you mentioned an estimate of at what level of normal capacity you and maybe some of the others in the industry were able to run their mills because of the different constraints with the virus. I think, if I remember correctly, you said maybe 85% to 90% of normal capacity. Do you feel like that's kind of the same? Or has it gotten better or worse in the last few months?

And then to that end, does that kind of put a floor on how low pricing can go? And I know it may be different with lumber and panels, but can you -- is there a new normal we can expect that might be higher than we've seen in the last few years until there's COVID issue is resolved, all assuming demand holds up and it's robust as it's been over the last 6 months or so.

Yes, Ruben, this is Wayne. I think it's gotten marginally better or it did through September. And then since Labor Day, the contagion rate has started to go back up. So I think some of the operating practices are still helping. And as Mike said, some of the labor availability issues in terms of being able to hire people has improved. But in the last 4 weeks in a number of places that COVID contagion rate has accelerated. So we'll see what happens on the production side and how much impact that has as we move into winter. But the community contact rates in a number of places are becoming more problematic, which is evident from the broad national news.

The other thing that Mike didn't touch on EWP, and it probably goes across -- most of the products is the mix of housing starts has changed. So to the extent we go to 1.350 million or 1.380 million as many expect in 2021, a higher proportion of those are likely to be single family starts. And in a number of cases, it's people that are moving out of urban areas that have pretty good personal wealth. And so to the extent you see single family starts, a typical single-family start will usually use about 3x the amount of product the multifamily start uses. And to the extent you have people that are starting those homes, and it's a result of work from home and they are higher income people, like in tech jobs moving to cities outside the Bay Area, you may see a change in the median home size that would also provide a tailwind.

But that mix of heavier to single-family and lower to multifamily is likely to create incremental demand as we get into '21 as we've seen late this year.

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

Great. Good morning, everyone. I just wanted to start out in Wood Products with a 2-parter. First, could you just touch on the divergence we've seen here between plywood and OSB? And how you think about the sustainability of that trend? And then second, OSB was a decent headwind in Q3. But could you remind us what kind of lag you have with inventories? And how that might further kind of pressure the cost side in the fourth quarter?

Yes. So yes, it's an interesting set of circumstances, as you point out, with OSB holding up so robustly and plywood, obviously taking a significant hit. The way I look at it is a bit like this. I'll speak about plywood first. So the run-up in plywood prices sort of in parallel with OSB was pretty much as we would expect.

However, recent times, if you look at whether it's domestic production in certain locations or geographies, thinking more principally of the southeast, there has been a bit more production. And so supply has increased domestically.

In addition to that, imports from Brazil, basically pine sheathing plywood have dramatically increased in the last 3 months or so. And year-to-date, the last numbers, I saw, this was at the end of September. Brazil imports were up like about 18% year-over-year, all of which really occurred in the last 3 months.

So that's obviously bringing more supply into the market. And as you would appreciate, that can have a pretty dramatic impact in the marketplace. And why has an OSB declined? Well, I think there's probably a couple of comments I'd make around that. One is there have been a number of impacts on the production so there's a type of resin that OSB producers or some of them use called MDI.

And with the storms that came through Louisiana, the production of that was impacted. So I know some producers, not all producers have been impacted in terms of their ability to run some of their locations. So there's a little bit more restriction on the availability of OSB. And with those sort of -- you have one being somewhat more restricted and the other one having additional supply show up, then you get the divergence, I think that we've seen at this point in time.

As it relates to OSB and its impact on us and our inventory levels, we generally hold a significant amount of OSB inventory for web stock production for our I-joists. And yes, we did have some challenges earlier in the year because everybody had curtailed, reduced their production. But we don't have a problem at this point in time in terms of the availability.

Our pricing mechanisms are such that we sort of trail behind and then we catch up and if OSB prices were to fall, we again would sort of have a lagging impact on our cost structure. If you think about it, it's sort of like $100 on the index represents like $0.10 a foot on our square foot that is. So it does impact our cost structure, but it's relatively speaking, not a huge impact. Of course, it's something, but it's not the level of impact that drop in plywood prices has on Wood Products' profitability.

Got it. Okay. And then just switching to Elgin, and I realize it's a fluid situation, but it sounds like the majority of that production is plywood. But if you had to really cut back there, would that impact veneer sourcing at all for EWP production in the West?

Not really, not so much. So historically speaking, the Elgin plywood facility has played basically no role in our engineered Wood Products activities because of its distance from Medford, which is where our large EWP facility in the Western United States is located. In the last maybe year or so, we have taken some stress rated veneer from Elgin to White City or Medford. But the way I look at it is more along the lines of -- it's not a significant impact. If we have run that facility at White City or Medford without veneer from Elgin, which indicates that it's nice to have but not absolutely necessary.

So we'll continue to evaluate that. And as I'm sure you've probably read from some of the announcements, we're taking a very precautionary sort of view of what might happen at Elgin. There's been no decision to shut the mill. We're just making sure that people are aware that we have a number of issues that we would have to resolve in a timely fashion for it to not either be curtailed for a shorter or longer period of time. I'm reasonably confident that the steps that have been taken over the last few weeks, in particular, that we may be able to find a way out of this malaise by early next year.

Got it. Okay. That's encouraging. And then just lastly, on the $80 million to $90 million of CapEx next year. Any discrete capacity or efficiency investments worth calling out on the Wood Products side? And then within BMD, any bigger ticket expansion plans with door shops or anything along those lines?

So I'll speak to the Wood Products stuff again. The -- so we have, in some respects, unfortunately, sort of fallen behind a little bit on what I'd call maintenance CapEx. As you depreciate this year with COVID, the availability of contractors and the necessity to run the machinery as rapidly or quickly as we possibly could, has certainly put us a little bit behind on our, what I'd call, maintenance CapEx spending.

As it relates to, is there a significant amount of the Wood Products CapEx that's allocated to add additional throughput capacity? The answer is really not very much at all. Mean, we'll be hopefully able to change out some old equipment for new, but it won't have a dramatic impact on the throughput of any of our facilities per se. Most of that work has pretty much come to a halt or being concluded, might be a better way of putting it. And what hasn't been finished yet, I hope to see that sort of wind up by the middle of next year.

Then I'll let Nick answer your question. But I think in general, you should expect spending later this year and into '21 to continue the door initiative as well as build out the real estate footprint. Nick's got a number of markets that he'd like to get into that we're serving with long truck hauls today.

And then we will opportunistically also look to take ownership of some of the real estate footprint, where we have a flexibility under some leases to do so, and we think it makes sense financially. We will likely deploy some cash to own properties rather than lease, again, where that financially makes sense.

Our next question is from Paul Quinn with RBC Capital Markets.

Just to start maybe on the EWP side, taking a look at your Slide 5 and noticing the LVL prices have been down basically going down for the last 7 quarters. Just trying to understand that. And just on the I-joists side, I suspect you got quite a bit of cost headwinds with OSB and lumber prices out. What's the traditional lag between when you see significant inflation in your cost and then whether you're able to gain back price on the sale of -- in terms of your sale price?

Yes, Paul, this is Mike. Yes, the drop in LVL pricing over time, I think, has really been a reflection of what's been happening in the marketplace say prior to COVID is really hitting. So when housing starts were somewhat lower, I guess I could put it like this, there was sort of an abundance of LVL supply relative to the housing start number.

And of course, that brings pressure on pricing. And as a result, we took some action in certain locations, which basically brought down our pricing. Along the lines, we wanted to make sure that our customers certainly had available product. But also, we -- it's a very competitive marketplace. So we had to make some adjustments there to maintain the volumes that we wanted to have. As it relates to I-joists and cost versus price, yes, as I pointed out a little earlier, the input costs for OSB web stock, yes, they have made a difference year-over-year. And it's not insignificant for sure, but we have an average that we use.

And usually, it takes about a quarter or so for that to work its way through, either up or down, the way we work with our partners and supplier. So as things went up, we trailed a little bit behind. And should they stay up, I guess, we sort of catch-up. And then, of course, as it goes down, we have to wait a while for that to get into place.

The reality is that EWP pricing is not based directly on input cost, it's a market-driven situation. And each market is a little bit different, and we compete with different companies in different places. So while our input costs may have gone up in some way or form, that doesn't necessarily give us an automatic mechanism by which to adjust pricing. That's been the way that EWP pricing has worked for a long time. It's not -- certainly not a commodity, and that's part of the approach.

You asked about lumber. We only use lumber in our solid flanges in our Canadian location. And we do use some lumber, of course, for our GLULAM beam facility. And both those locations have sort of taken it on the chin in the last few months in particular. But if you think about those 2 specific mills relative to our overall EWP capacity and the sales that have generated those relative to the total, it's not insignificant for the 2 mills. But relative to the overall profitability of the division, it's not that large a number.

Great. And then, Mike, I think you did a great job explaining that difference between plywood and OSB. Just curious whether you've seen any kind of substitution back to plywood from traditional [users] given the price differential in that?

Not quite yet, but I am hopeful, is the answer. With the spread as big as it is at the moment, you think that sooner or later somebody would start using some plywood as underlayment again, wouldn't you? I will leave it there.

Maybe the last one, just on the BMD side, we saw a mix shift to a higher commodity in Q3. I take that as a 1-timer, given the high, I guess, commodity prices and should go back to sort of a 40% overall?

Paul, Nick Stokes here. I think that's the answer. Certainly, the inflationary effect on commodities was huge. Indexes were up $300, $400 and skewed that. I don't think there's anything fundamentally going on other than that.

But it's -- Paul, other than the inflation, it's been -- commodities have been running at about 42% of sales for BMD.

Your next question is from Mark Wilde with Bank of Montreal.

Just a couple of follow-ons. Is there any likely impact on Boise Cascade from some of this consolidation we're seeing going on over in the pro dealer channel?

Mark, it's Nate. Let me -- I'll take a shot at that and Mike and Nick can jump in. So both -- some of the consolidation that you've referenced, we would -- and we have seen the consolidation take place in the lumber yard space over the last couple of years. Obviously, the announcement a couple of months back, we would expect that trend likely to continue. Just like we've seen that, frankly, on the national builder side of things as well. So we have strong relationships with both of those entities. We expect that going forward. And we expect the consolidation theme to continue as we head into 2021.

So it's something I think we're prepared for and something, again, we're expecting as we head into '21 and beyond, frankly.

Okay. The other one I had, just as a follow-on, it seems like we're seeing more competition coming out in the composite decking business. And I just I'd like to get your thoughts on what you're seeing in terms of volume in that business and new entrants coming into the business. It's been a kind of a high growth, high multiple business.

Mark, Nick here. I think we have a pretty slanted view of that in terms of the overall industry. We have a primary relationship with leading brand. And so we're probably not as in tune with some of the new manufacturing entrants. I would tell you that we continue to be really pleased with our supplier partner in terms of -- we do have -- they continue to innovate. Our business there continues to grow. But to your good point, I think the whole category is growing. And certainly, the challenge associated with wood treated decking through the spring and the summer, probably accelerated that a little bit in terms of people's desire to upgrade into composites. So we don't have a very good view of the overall industry there to be candid.

Your next question is from George Staphos with Bank of America.

Maybe a question for Wayne. Wayne, remind me, you might have already covered this last quarter and I forget, but is there an amount of spending to the point that Mike was mentioning earlier, you brought back spending. Obviously, in the environment that we've been in, you've had lower spending, higher pricing in (inaudible). How much of that spending might be reintroduced to the P&L next year? And is there a way to put a number on that? I remember you may be mentioning this on the last conference call, I apologies if you did not forget, but if you had a number or some way to guardrail that, that would be great. And then had a question on imports.

Yes. I think Mike can probably speak to the maintenance. I mean, obviously, with COVID, we're seeing much lower numbers on T&E. And with profitability, we've got much higher incentives being accrued this year. I think in terms of the capital spending side, as Mike said, we'll get back probably closer to a $50 million spend in wood next year, assuming the engineering resources are available. And assuming we can manage the outages from a customer demand standpoint, particularly on the EWP side.

But again, I tend to think of the business is around $50-ish million of capital in wood to continue to make modest productivity improvements and reliability improvements. And then in Nick's business, I tend to think of it has scaled today in the $25 million to $28 million range. And then a couple of million a year for IT. And part of the reason that spending numbers reaccelerated this year as Nick was able to make a real estate purchase northeast of the Nashville market. And so he's investing in the real estate footprint in the Nashville area, which is part of the reason that the capital numbers went back up to $60 million to $75 million.

We've been able to reaccelerate some projects that were on hold earlier in the year.

If you had to think about -- I know you don't want to do this line item by line item nor would we expect it. But broadly, if you think about things like T&E and other expenditures that have been curtailed for obvious reasons. If we were in a normal year, as somebody else said, whatever that might mean earlier on the call, how much spending would we see -- how much of an increase would we see? Ex -- I'm not talking about CapEx, I'm just talking about your spending.

Yes. I think the T&E, and Kelly Hibbs, I think, is on the call, our controller. I think the T&E savings is probably in the $8 million to $9 million range for the year. And the offset to that is, with our EBITDA likely to come in well north of $300 million, I would tell you we're going to have more than an offset to that on incentive compensation this year relative to where our normal incentive compensation target payouts would be.

Okay. And then the other question I had, and I'll wrap up from my side. The Chileans and the Brazilians have been talking about shipping more product into North America for a couple of quarters now, at least from our vantage point. Aside from just the level of pricing that was reached by plywood earlier in the year and in the third quarter, in particular, why do you think we're seeing that level of import now really ratchet higher? Is it purely price? Or is there some other constraint that you saw that we might not have seen in terms of why it's accelerated?

George, I would probably mention 2 things as it relates to the Brazilian imports. I think currency is playing a major role. I think the prices we had in the U.S. and then there's tariffs in Europe that usually go on sometime around April. The Brazilians and others will usually ship into Europe in the first quarter and somewhat into the second quarter before the tariffs take impact. So I think the combination of those 3 factors is part of the reason you've seen the acceleration in the fall been more pronounced this year, but I think it's because of the record pricing we saw in August and September, and there were some delays in shipments out of Brazil. So I think now they're shipping in response. And my assumption is that we will see some backing away as we move through the balance of this year and into the first quarter, because I would expect with the pricing changes that have occurred in the Southern U.S. that they'll redirect some of that volume to Europe early in the year before the tariffs go on.

And with that, Chris, I think we're about out of time, and -- you're welcome. Unless there are other questions in the queue, I guess I would maybe turn it back to Nate to wrap up.

Great. Thanks, Wayne, and thanks, everyone. We appreciate everyone joining us this morning for our update, and thank you for your continued interest and support of Boise Cascade. Please be safe, and please be well. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.

Thanks, Chris.