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Boise Cascade Company (NYSE:BCC)

Q1 2014 Results Earnings Conference Call

April 23, 2014, 11:00 AM ET

Executives

Wayne Rancourt - SVP, CFO and Treasurer

Thomas Carlile - CEO

Nick Stokes - EVP, Building Materials Distribution

Thomas A. Lovlien - President, Wood Products

Analysts

George L. Staphos - BofA Merrill Lynch

Alex Ovshey - Goldman Sachs

Chip Dillon - Vertical Research

Bill Hoffman - RBC Capital Markets

Steven Chercover - D.A. Davidson & Co.

Adam Rudiger - Wells Fargo Securities

Operator

Good morning. My name is Kevin, and I'll be your conference facilitator today. At this time I would like to welcome everyone to the Boise Cascade First Quarter 2014 Conference Call. (Operator Instructions).

Before we begin I'll 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 to you Wayne Rancourt, Senior Vice President, CFO and Treasurer, Boise Cascade. Mr. Rancourt, you may begin your conference.

Wayne Rancourt

Thank you, Kevin. Good morning, everyone. I'd like to welcome you to Boise Cascade's first quarter 2014 earnings call and business update. Joining me this morning on today's call are Tom Carlile, our CEO; Tom Lovlien, Head of our Wood Products Operations; and Nick Stokes, Head of our Building Materials Distribution operations.

Turning to slide two I would point out the information regarding our forward-looking statements, the appendix of the presentation includes reconciliations from our GAAP net income to adjusted net income and EBITDA.

Now I'll turn the call over to Tom Carlile.

Thomas Carlile

Good morning. Thank you for joining us on our earnings call today. I am on slide three. It was a challenging first quarter in both of our businesses, as an unusually harsh winter tempered what we had expected for end product demand. We reported $767 million of sales in the first quarter, up 3% compared to the first quarter of 2013.

Plywood sales growth, resulting from our acquisition of two plywood facilities at the end of third quarter of 2013 and higher product shipment volumes in our building materials distribution business more than offset the impact of lower commodity prices and drove the modest increase in sales.

We earned net income of $5.6 million in the first quarter 2014 which was down $6.6 million from the adjusted net income of $12.2 million reported in the year-ago quarter. As we discussed on our last earnings call we expected this quarter to be a tough quarter for revenue and earnings comparison given last year's first quarter elevated commodity pricing and structural panels for support structural panels and lumber.

The string of severe weather events this year compounded the situation with a significant number of lost shipping days and higher operating costs. Fortunately we saw better demand in late March and that has carried into April. We should have a better feel for the actual state of the new home construction as we get through the next six to eight weeks and we are able to sort out how much of the lack of activity in the first quarter was solely due to weather and how much is reflective of general economic conditions hindering the pace of the housing recovery.

Consensus estimates for 2014 housing starts have dropped modestly which is not surprising given the weaker than expected activity level in the first quarter. We still expect the full year to show improvement over 2013 and believe over the next few years U.S. housing starts will returned to long term trend levels of a $1.4 million $1.5 million. With that overview I’ll ask Wayne to provide more detail on the financial results.

Wayne Rancourt

Thank you, Tom. Turning to slide four, wood product sales were $293 million in first quarter, up 9% compared to the year-ago quarter. The sales increase was attributable primarily to 20% higher plywood sales volumes, 5% higher engineered wood products prices and 23% higher lumber prices, offset in part of by 11% lower plywood price. Wood products first quarter EBITDA was $23 million, down $4.1 million from a year ago quarter. Lower plywood prices and higher wood fiber cost were the principal factors behind the earnings declines. The recently acquired plywood operations contributed $2 million of EBITDA in this year’s first quarter.

BMD sales increased 1% to $586 million in the first quarter due to 5% higher volumes and 4% lower prices than in first quarter of 2013. BMD’s first quarter EBITDA was $8.2 million, down $2 million from the $10.2 million reported in first quarter of 2013. I would note that the $8.2 million reported in the first quarter for BMD included a $1.6 million pretax gain from selling to surplus properties.

Turning to slide five, our first quarter plywood sales volumes in wood products showed the impact of the recent acquisition. We are continuing to sell a portion of the production from the new facilities at [inaudible] which doesn’t show up in the plywood sales data. We are planning to share EBITDA for the acquired facilities till the anniversary of acquisition but for competitive reason we do not intent to break out product level sales data for those individual mills.

Our $294 average net sales price for plywood was down 11% from first quarter 2013 and down 3% sequentially from fourth quarter of ’13. Plywood pricing is a key driver of the financial performance for wood products so we pay close attention to our production levels relative to what we are seeing in market demand. We did take a modest amount of market related down time earlier this month at our Medford, Oregon plywood operation to keep our production and inventories in line with demand and transportation constraints.

In March we experience service disruptions on transportation including both truck and rail car availability which hindered our ability to shift committed volumes on schedule. The demand in transportation situation has improved since then and we are not anticipating further reductions in plywood production at this time.

Turning to slide six, our first quarter sales volumes for LVL and I-joist were each down 3% compared with the year ago quarter which was reflective of the tough environment for new single family residential construction in the quarter. Shipments have picked up in April and we believe the momentum will continue. Our LVL and I-joist sales price realizations each improved 5% from the year ago quarter and were essentially flat with fourth quarter 2013. We believe the pricing dynamics for engineered wood products will continue to improve as industry capacity utilization rates move higher with increased housing starts.

Moving to slide seven, BMD’s first quarter sales were $586 million, up 1% compared with the year-ago quarter. As I said earlier volume gains were 5% and largely offset by price declines of 4%. Lower prices within our commodity category compared to first quarter of 2013 particularly for oriented strand board entered our top line growth comparison and negatively impacted our expense leverage.

Those that have been following our company since last year will recall a deep decline in commodity pricing in second quarter 2013 and the negative impact it had on our gross margins and reported earnings in the distribution business. We anticipate improved earnings comparisons for the distribution business in the second quarter of this year as business activity has finally picked up and commodity pricing has been less volatile then what the industry experienced in the first half of 2013.

On slide eight we set out the key elements of our working capital. Company working capital increased $39.1 million during the first quarter. BMD’s inventory investment increased about $38 million during the quarter in anticipation on the spring selling season. Some of the inventory investment was covered by our vendors with extended terms, which is why our accounts payable also jumped in the quarter. The seasonal accounts payable turns will run of in the second quarter and we will be making our semi-annual interest payment on our senior notes on May 1st.

As noted earlier sales activity in late March picked up contributing to the rise in accounts receivable compared to year-end. As a reminder this statistical information filed as exhibit 99.2 on our 8-K has receivables inventory and accounts payable data broken down by segments for those that are interested in more detail.

I am now on slide nine. We used $32.3 million of our cash in the first quarter to fund the increase on working capital which is a typical seasonal occurrence. Our bank line availability and balance sheet cash give us considerable flexibility to grow our businesses organically or through targeted acquisitions. I expect our free cash flow generation to improve as we move through the balance of this year. And with that I will turn it back to Tom to wrap up.

Thomas Carlile

Thank you Wayne. The consensus to estimate for 2014 total U.S. housing start now stands at a 1.08 million which would be up about 17% than the starts experienced in 2013. We believe the demographics in the U.S. should support a return to residential construction of 1.4 million to 1.5 million starts per year in the years ahead. We will continue to manage our business to be supportive of our customers and capture the opportunities the markets generate. The part pricing has been volatile over the last 18 months and that could continue to be the case as producers and customers try to predict and react to changes in supply and demand. With that in mind we will be closely focused on market conditions and will be appropriately nimble on production and inventory level.

I'm optimistic about the outlook for the remainder of the year. We expect to see additional production in earnings from acquired mills as we target maintenance and capital spending to bring the mills up to our standards and continue to implement the operations improvement process used at our other facilities.

EWP sales volumes are back on their upward trend and as we move into spring we expect further revenue and earnings growth in our distribution business. In addition to the leverage we will get out of existing businesses we will continue to look for additional opportunities to create shareholder value. At the moment acquisition values are challenging given the liquidity available in the debt markets and the seller value expectations but we are continuing to seek out favorable situations to grow our company.

Thank you again for joining us on our call this morning and your support as investors. We welcome any questions at this time. Operator, would you please open the phone lines?

Question-and-Answer Session

Operator

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

George L. Staphos - BofA Merrill Lynch

Good morning. Congratulations on the progress. First question I have Tom seguing off your last comment giving that M&A multiples seem like they are higher at least that's the implication what you’re saying, do you therefore see perhaps more opportunity this year to use cash flow for buybacks say as a way of increasing shareholder value and then I have some follow on.

Thomas Carlile

Hi George as we have stated in the past, our first priority is try to grow the company if we can find opportunities that add value and then we would look at returning cash to shareholders. We do not have a plan to already to discuss already that at this point in time but it’s a topic we discussed at the Board meeting every time we meet.

George L. Staphos - BofA Merrill Lynch

Okay, so maybe the summary would be so to the extent that you can comment on a forum like this we understand is that you’re still going to keep beating the bushes for investment candidates and you haven’t yet become so frustrated that you’re considering a buyback at this juncture, would that be fair?

Thomas Carlile

That feels better now than it used to yeah.

George L. Staphos - BofA Merrill Lynch

Okay, second question I had, I mean back in February, realizing that's a couple of months ago and a lot of bad weather since then a slower start to the year since that point you’re saying that your customers both on the distributor and the builder side were optimistic about the year are there from your advantage point similarly optimistic about the prospects for 2014, recognizing we lost maybe a month or two here or they also been a little bit more cautious on the outlook for the building season this year recognizing it ultimately your hope that you’re going back to 1.4 million, 1.5 million trend line?

Thomas Carlile

George what we’re hearing from our customers is they remained optimistic and positive. They are telling us they are seeing a business pick-up which we’re seeing in our shipments. So I think the general tone is still positive.

George L. Staphos - BofA Merrill Lynch

Okay, two last ones and then I’ll turn it over. Should we worry at all and why not that you know with drier projects that you [inaudible] and you are growing your veneer that if EWP doesn't really pick up you hope it does with single family starts that you might wind up excess capacitizing the plywood markets other than they would otherwise be and then can you comment at all on what the impact from the downtime at Medford was in the quarter? Thank you.

Wayne Rancourt

Yeah maybe I’ll take that one George. I think we are very cognizant of the impacts on the near production and whether closing the EWP in plywood we are trying to do it on a metered basis to make sure that we don't end up in the situation that you mentioned. So we are not expecting our plywood volumes to grow and so far the absorption rate in EWP has been in line with what we have expected, so particularly got into late March and April we feel good about the takeaways.

As far as the downtime in Medford, it was very much in response to what we are seeing on transportation difficulties and building inventory and again when we look at order files and demand rates we are trying to be responsible and nimble. We have lost or took down by choice about a week’s production and it's probably about 4 million feet. So if you compare that to the 400 plus million we sold in the first quarter you know you are talking about 1% of production and some of that may get made up in the second quarter but we are not inclined to push product into the market if it’s going to end up driving prices down.

George L. Staphos - BofA Merrill Lynch

Thanks for the detail Wayne. I’ll turn it over.

Wayne Rancourt

Thank you.

Operator

Our next question comes from Alex Ovshey with Goldman Sachs.

Alex Ovshey - Goldman Sachs

Good morning, everyone. Good morning Tom. Couple of questions for you guys. On the distribution business your volumes were up obviously the pricing comparison was difficult on a year-over-year basis. Would you be able to sort of help us with the bridge, you know what was the positive impact of the volume being up in the distribution impact, what was the negative impact of have lower selling prices? Any other sort of maybe one time issues that may have impacted the first quarter of ’14 versus last year?

Thomas Carlile

The distribution business is a bit of a challenge. I mean it gets essentially the same revenue number we had 5% higher activity if you think about the volumes we’re shipping.

Alex Ovshey -- Goldman Sachs

Yeah.

Thomas Carlile

And probably the positive side is oriented strand board if I look at where it was on the north central basis you know we went from 420 I think on north central to the low 200. So you think about trying to maintain the same revenue you have to ship twice as much LSP volume. So that was clearly an impact and if you look at February our daily sales rate dropped to about $8.6 million and if I look at that compared to where we were in March, we were probably $1.2 million higher in March and if you think about where the profitability comes in that business most of the operating leverage comes to about 9 million daily sales in terms of recovering payroll and recovering fixed cost.

So clearly having spring activity be better in late March and April is going to help profitability a lot in the second quarter per man day.

Alex Ovshey -- Goldman Sachs

I got you. And then just as a follow up I mean in the second quarter of last year I believe there was inventory adjustments given sort of steep correction in price was there anything like that, that was flowing through the numbers in the first quarter of ’14?

Thomas Carlile

No, I mean things were pretty stable. We had, you know if you look at the lumber composite in the fourth week of the quarter it was slightly above 400 and at the end of the quarter it was at 362. So not a huge percentage change on lumber and that’s probably the one commodity product where we saw some declines in price throughout the quarter. Panels were actually pretty stable. They kind of covered panel composite hovered right around 360 for most of the quarter.

Alex Ovshey -- Goldman Sachs

Got you, yeah that’s right. And then on the EWP side would you be willing to tell us what your April volumes were up by?

Wayne Rancourt

Alex you know we can tell you that our April volumes have picked up nicely. We are not going to give you a percent but the activity in EWP has been very strong.

Alex Ovshey -- Goldman Sachs

Got it, I mean that’s fair obviously. It's still early on. Okay and then just my last question I mean we’re quarter through and I guess maybe a little bit more into that in terms of fiber inflation can you just update us on what your expectation is for fiber what fiber inflation in 2014?

Thomas Carlile

Yeah, I mean as we've alluded to on prior calls, fiber inflation that we're seeing is principally in the west and it fluctuates a lot depending on what China is doing and what's going in the export market. And that has -- activity level has backed off in the last several weeks from where it was earlier in the first quarter. But we're probably up close to 10% in the west and wood cost compared to the first quarter of 2013. I'd contrast that with the South which as many of you know our opinion is that given growth rates down there and given the housing downturn we think there is a pretty good availability on the growth of -- and certainly unfavorable in the south. And we haven't seen any real increase in our delivered wood parts in the south if you compare to a year ago.

And I think that's consistent with what couple of other -- guys have said their experience on their value. So we do pay attention to what those guys are seeing, but most of the inflation has been in the west. And by building inventories in the fourth quarter we were able to large part stay out of the way of the first quarter prices usually unlocks in the west.

Alex Ovshey -- Goldman Sachs

Very helpful. Thank you very much.

Thomas Carlile

Thanks Alex.

Operator

Our next question comes from Chip Dillon with Vertical Research.

Thomas Carlile

Good morning Chip.

Chip Dillon - Vertical Research

Gentlemen, first question is on the lumber side. I think we this is a big one for the model. Maybe we have to wait for the Q, but what was the volume and what was the average price there?

Wayne Rancourt

Price was up 23% at -- So we came in at 569.

Chip Dillon - Vertical Research

Okay.

Wayne Rancourt

And then on the volumes we were actually down 8% compared to the year ago quarter. One thing I'd mention is the lumber we produce is really going to guys that are doing windows and doors and industrial and going to home centers. So don't contrast with guys that are selling mansion for framing houses.

Chip Dillon - Vertical Research

Got you, understand. So the volume is around 46 million square feet or more feet.

Thomas Carlile

Yes.

Chip Dillon - Vertical Research

Okay, got it. And then you've kind called out $126 million gain from I guess selling a couple of properties. So obviously I'm getting to about $0.03 so sort of if you kind a strip that out what it about an 11 say quarter. Is there anything else that I missing there?

Wayne Rancourt

No.

Chip Dillon - Vertical Research

And do you have more of these properties you think you will be…

Wayne Rancourt

That was $1.6 million pretax.

Chip Dillon - Vertical Research

Right. So after tax I'm guessing this about $1.1 million and that would be $0.02 to $0.03 a share. And are there more properties like that out there for sale or are these are sort of intermediate?

Wayne Rancourt

No. This was we had done some relocation in Dallas to it not quite adjacent, but the property that allowed us to expand capacity in Dallas. So this was selling a surplus property near our plan on and then we also moved our Baltimore location to a larger facility and this is one that's near [commuter rail], our old location. So we were planning to sell to a developer.

Chip Dillon - Vertical Research

Got it. And I think Tom mentioned in terms of looking at acquisitions and I guess I'm thinking more in the distribution realm. Is really the issue of sort of to ask more important issue than the ability of financing. I would imagine you guys would have no problem given your strong balance sheet, getting financing, but then maybe it's more of a difference of opinion of what's realistic on price?

Thomas Carlile

Chip's that's the -- handicap has been expected valuations not financing.

Chip Dillon - Vertical Research

Yes, got you. And then I guess last one which is sort of the wild card here is, as you all look at the building season, I noticed last year I think it was this time last year, some of your contacts on the field were talking about difficulty in getting labor. And I think you all mixed some phoenix and frameworks for example. And as we go into this year do you think that problem's been solved and yet do you still think it's gone be and maybe a different way to ask it is. Do you think with the weather we've have that there could be a maybe a longer or even stronger season in the next of couple of months just because we need to make up for lost time. Or is there just not enough people -- are there not enough people out there to do the work?

Nick Stokes

Chip this is Nick Stokes. So I think the feedback that we get is generally similar. Although I think that the need has moderated a bit. Certainly if you look at housing starts in the first quarter they were down and so the acuteness of the shortage if you will probably wasn't resonating as widely as it might have been given our expectations. I think in some geographies those situations still exists.

Chip Dillon - Vertical Research

Got you, okay. Thank you.

Operator

Our next question comes from Bill Hoffman from RBC Capital Markets.

Thomas Carlile

Good morning, Bill.

Bill Hoffman - RBC Capital Markets

Wayne or Tom, I wonder if you just talk a little bit about what you are thinking you are seeing right now in plywood market condition. I mean you've talked about little bit of downtime in Oregon but I was surprised that your inventory increase this year was actually more muted than I might have thought, especially with the addition of the Southeastern plywood mills.

Thomas Lovlien

I could speak to that this is Tom Lovlien. Plywood markets are steady and as Wayne mentioned part of the reason we took the downtime in Medford was to make sure we balanced the supply and demand as we saw it at the time, plus in the Pacific Northwest we are continuing to have transportation problems which have not really mitigated even though the weather's improved and cars are starting to move out of the East Coast on a regular basis but we're still are facing issues with transportation and we have built some inventory in our plywood mills. However that inventory is old, and we need to get cars and trucks which we are working on.

Bill Hoffman - RBC Capital Markets

So your sense is the inventory downstream and is reasonably balanced at this point in time?

Thomas Lovlien

That's my sense.

Bill Hoffman - RBC Capital Markets

Okay. Second question is just has to do with given that we've seen significant weakness in OSP prices are you getting any sense if there is pressure on plywood markets from that? Are you guys switching and shipping back OSP now is somewhat similar to plywood?

Thomas Lovlien

I don't know -- again the plywood targeted market is a small percentage of the residential construction and there are still parts of the country that prefers plywood over OSP. But might be a little movement but we wouldn't say that's a big factor to our plywood demand.

Bill Hoffman - RBC Capital Markets

Okay, thank you and just last question the Southeastern plywood mills, any thoughts on how they are operating, how the cost position is there, is it running as you had expected now you get into the -- almost the first year of running those?

Thomas Carlile

Yeah Bill, the first quarter, the earnings out of the Southeast mill was below our expectation but it was -- a part of it was weather impact. We had downtime in those mills that we, because of weather which is highly unusual but probably a more important part of it was the maintenance work and the capital work that we've done, that impacts volume but also has higher cost structure.

We are working hard to make those facilities look like the rest of our plywood assets and that did impact us in the first quarter and will carry into the second quarter to some degree.

Bill Hoffman - RBC Capital Markets

Okay, thank you.

Operator

(Operator Instructions) Our next question comes from Steve Chercover, D.A. Davidson.

Thomas Carlile

Good morning Steve.

Steven Chercover - D.A. Davidson & Co.

So the first question Wayne you said you expect improved cost for BMD going forward. I am assuming that's a year-over-year comp and is there any way that we should incorporate the write down that you endured last year in the second quarter?

Wayne Rancourt

I mean if you go back to a year ago I think we'll -- that's where we really get surprised, we'll clearly be better than second quarter and I would expect to see improvement sequentially just given what we are seeing in daily sales rate.

If you look back a year ago we've made $10 million in the first quarter on an EBITDA basis in BMD and in the second quarter made $5.5 million. And I think that's clearly reflective of the down drop we saw in commodity prices and when I just think about where we are on a daily sales rate income in April I am quite comfortable that we will do very well compared to the second quarter of third scene and we'll do -- again unless we get really surprised that something we should do meaningfully better than we did in the first quarter of this year, in BMD.

Steven Chercover - D.A. Davidson & Co.

Great and second question, is it your sense that the wood product industry was prepared to supply 1.1 million starts this year as opposed to the new consensus of 1.08? And how does the seasonality in housing starts versus I think the kind of linear production of wood play into that?

Thomas Carlile

Well to be honest with you we are trying to manage supply and demand, as we see our order files on plywood, on our lumber business and the other products we produce. So being at the front end here on the earnings curve I don't have a good feel for where the LSP guys are in terms of supply and demand and where the lumber guys are. So in terms of preparing I don't know that you see a big difference between trying to prepare for 1.1 versus a 1.080 million. I think the real question literally is week by week there’s a lot of flex in the supply chain and how producers are responding, what they are seeing in terms of order file and pricing is probably more important than that 20,000 swing in housing start expectations. And as I say we are trying to be very thoughtful about what we are producing and what we are seeing on order files and how the supply chain is behaving so that we are not trying to push product into a market that’s not ready to accept it or is skittish about inventory levels.

Thomas A. Lovlien

I think our manufacturing guys have been very thoughtful about that through the first quarter and into the beginning here on the second quarter.

Steven Chercover - D.A. Davidson & Co.

Yeah I think since you came back as a public company you have been very nimble and that’s terrific. Do you have any sense what field inventories are like notwithstanding you managing to your order file?

Thomas Carlile

Steve as you know it is little difficult to get a hard view on field inventories. We do have a little bit of advantage and we have some we can look at our own distribution business. We don't think there’s a shortage in field inventories but we don't think there’s a glut. Another way to think about this is as we ended the quarter to a degree we had more inventory that we wanted in our plywood and lumber business. We had orders for that volume and we just couldn’t get it shipped. So that’s another way to maybe give you a flavor what might be happening out there.

Wayne Rancourt

I think particularly with the stability in the panel composite there hasn’t been a big push and just given the winter weather there hasn’t been a big push to build inventories for spring demand and there hasn’t been a big motivation in terms of people seeing a strong upswing in prices I think we finally got $5 movement up in OSP last week. So maybe that’s down at the bottom and maybe we are going to start seeing the demand pull up relative to supply but we don't get a sense that there’s a lot of inventory that’s been stuck in the channels. But flipside we also don't think that there’s a lot of people that are short in inventory at this point.

Steven Chercover - D.A. Davidson & Co.

And final question on that same front, the fact that rail car are now starting to move you also don't have the sense that guys are piling up unsold inventory within the mills I think it’s a real limit how much they can produce get into a box car?

Thomas Carlile

I’ll let Lovlien speak to our physical situation but generally we can have a couple days of inventory on the ground and that it starts to get to be an issue. At least in our situation we do not have storage capacity to build inventories beyond just few days of production and to the extent we get there we really particularly from a safety perspective we really don't want and don't generally build those inventories beyond those few days because it's dangerous putting material in areas where it’s not normally at, so you know part of the track [inaudible] et cetera et cetera and so we are very careful about not getting ourselves in the situation where we can ultimately get that wood shipped in an orderly manner.

Steven Chercover - D.A. Davidson & Co.

I understood. Okay, thanks Tom, Tom and Wayne.

Thomas Carlile

Thanks, Steve.

Operator

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

George Staphos - BofA Merrill Lynch

I have a follow on. First of all could you give us a sense what operating rates across your major business presuming that they are not up significantly from last year but you had any kind of [inaudible] it will be helpful. And then on the West Coast you know Wayne was there much effect at all from residual markets in terms of profitability and so you had a big number or a small number and can I add one another question.

Thomas Carlile

No real change on the residuals.

George L. Staphos - BofA Merrill Lynch

Okay and on operating rates?

Thomas Carlile

Yeah and if you look at plywood we are still with the exception of Medford we are still running pretty flawless. Tom said we have had some production issues in the new mills in the Carolina leaded to weather and we are doing some focused things on maintenance, but I would expect the production to be up quite a bit in the second quarter there. But again we’ll be very mindful about where prices are and where demand is in spring. So we are probably in if you look at the system in the low to mid 90’s on the plywood of the near mill so pretty full operating rates. And certainly if I look at our recent shipments out of Alexandria the big EWP store in Louisiana that’s come up quite a bit if you looked at system in general I would guess that we are probably running at 65% to 70% on EWP.

And on lumber again we are looking at product markets and producing basically to demand and paying attention to log availability and margins and I don’t wouldn’t expect of it change in our lumber production. We are kind of running what we want to run relative to log availability and then product markets and we think we are on the pretty good balance there. So I wouldn't look for a big change in production on that and it’s not a big item in our affairs but a part of our board mill has been running at a much higher operating rate this year and that’s basically responding to increased demand from the downstream market. So feel pretty good about our operating rates really the upside for us is principally going to be in EWP volumes.

George L. Staphos - BofA Merrill Lynch

Okay. With part of wood running well I mean it’s should we take in as a good indicator for future demand for the rest of your business i.e. particle board is doing well and I am guessing some of that’s may be finding its way into furniture and that is a lot of that things produced here as use to be the case and some of the other end markets that might be a forerunner of your lumber and plywood markets were that off base?

Thomas Carlile

No that’s not off base that you are right on track because the significant part of our product what now goes into kitchen cabinet business. And that business is growing and that’s been our major contributor to our ability to take our mill back to normalized levels it’s not a 100% by any stretch but certainly we are running a much higher level than we did over the last three years that you are right on. And it helps on the residual situation at Northwest Pacific and particle board ramps up more to residuals can flow with that operation.

George L. Staphos - BofA Merrill Lynch

Right. Tom do you have a view on how much cabinet related piece of particle is upward because generally how much is particle board was up for you guys this year versus last year?

Thomas Carlile

Well if I look at our volumes were up about 30% from last year.

George L. Staphos - BofA Merrill Lynch

Really. And that believe it’s my last question you know with cabinets currently picking up and you know that’s hopeful as a sign for repair model Do you have a sense for home improvement customers home improvement center customers whether big ticket is improving at all within the repair model and then broadly what do you think for your growth rates here this year?

Thomas Carlile

That’s always a top now. We get a sense that there is been some pick up but it’s our volume the products we sell to the big boxes continues to increase but go beyond that with you…

Thomas A. Lovlien

We are probably not the regulators on that beyond that that on the repair remodel our general assumptions based on what we are seeing is that repair remodel to be up some around 4% to 5% this year.

George L. Staphos - BofA Merrill Lynch

Okay. And your customers think that big ticket is coming back or not?

Thomas A. Lovlien

I don’t have any information on that beyond that.

George L. Staphos - BofA Merrill Lynch

All right. Thanks for your answers guys good luck in the quarter.

Operator

Our next question comes from Adam Rudiger with Wells Fargo.

Wayne Rancourt

Morning Adam.

Adam Rudiger - Wells Fargo Securities

Hey Wayne. First I jumped on a little bit late and I apologize if these have been asked already. And the first question was on the increased fiber cost, is that -- can you quantify that? And can you talk about historically how those costs changed relative to periods like now where prices are little lower and volumes are not doing a whole lot different versus a year ago?

Thomas Carlile

Adam you know Wayne answered the question probably pretty good on but in general in the West our fiber cost increased around 10% in the quarter and it's flat in the South. On a historical trend basis fiber cost in the West typically is higher in the first quarter as you get through all the winter issues and depends on how much, how many logs the industry put an inventory and add going into the winter months.

We see some moderation on the West as the export demand has come back a little bit. But the West is a much more competitive fiber cost market. We don't anticipate much change in the South and again the wood basket of our new plywood plants is our lower cost wood basket and we like what we are experiencing there.

Adam Rudiger - Wells Fargo Securities

Okay. Sorry for asking the duplicate question. And the second question I had is when you think about the rest of this year may be even next year seems so much is just hinging upon overall improvement in new construction and demand. So aside from those things, aside from big macro demand we all are waiting for when you think about the initiatives or the things that you are working on at the opportunities for improvement what would be the biggest areas or the biggest opportunity that you have internally when you look at your businesses?

Thomas Carlile

Well the biggest levers, other than price which we all know is huge for us would be in the manufacturing and it's activities like the dryer project which also which generates more veneer but they also significantly lower our manufacturing costs. We'll get some improvement in our Southeast operations that we had anticipated when we acquired them. But we continue to make some improvement on the manufacturing and recovery component in manufacturing.

In distribution it's more. It's a longer lead time as we add products and we work on margins we do that all the time but it's kind of the gradual improvement versus something significant.

Adam Rudiger - Wells Fargo Securities

Okay. Thanks for taking my questions.

Operator

I am not showing any further questions at this time. I would like to turn the conference back over to Wayne for closing remarks.

Wayne Rancourt

Okay. Thank you Kevin. Thanks everyone for joining our call today, your interest in our company and if you have any follow up questions please reach up to us and we'll be happy to answer them. Thank you.

Operator

Ladies and gentlemen this concludes today's presentation. You may now disconnect and have a wonderful day.

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