Boise Cascade Company (NYSE:BCC)
Q2 2016 Earnings Conference Call
July 28, 2016 11:00 AM ET
Wayne Rancourt - EVP, CFO & Treasurer
Tom Corrick - CEO
Dan Hutchinson - EVP, Wood Products
Nick Stokes - EVP, Building Materials Distribution
Mark Wilde - BMO Capital
George Staphos - Bank of America Merrill Lynch
Good morning. My name is Brian, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Boise Cascade’s Second Quarter 2016 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions].
Before we begin, I remind you that this call may contain forward-looking statements about the company's future business prospects and anticipated financial performance. These statements are not guarantees of future performance, and the company undertakes no duty to update them. Although these statements reflect management's expectations today, they are subject to a number of business risks and uncertainties. Actual results may differ materially from those expressed or implied in this call. For a discussion of the factors that may cause actual results to materially differ from 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 of Boise Cascade.
Mr. Rancourt, you may begin your conference.
Thank you, Brian. Good morning, everyone. I’d like to welcome you to Boise Cascade's second quarter 2016 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.
And with that, I will turn the call over to Tom Corrick.
Thanks Wayne. Good morning everyone. Thank you for joining us for our earnings call today. I’m on Slide 3 right now.
Our second quarter sales of $1.04 billion were up 9% from second quarter 2015 as a result of growth in engineered Wood Products and our Distribution business. Our net income of $19.2 million was down 5% from second quarter 2015. Wood Products reported segment income of $16.3 million in the quarter or EBITDA of $31.1 million.
The team in Wood Products did an outstanding job during the quarter of managing the integration of the recently acquired EWP facilities in Alabama and North Carolina. The acquisition was essentially neutral to EPS in the second quarter.
Wood Products made a number of operating changes during the quarter to increase the proportion of the internally produced veneer used in EWP and to reduce our plywood production in response to market conditions. In addition, we have seen good progress on a number of actions to improve efficiencies and control costs, while we combat the current weakness in plywood and lumber pricing.
Building Materials Distribution reported segment income of $29.1 million or EBITDA of $32.5 million. BMD took full advantage of the seasonal uptick in demand for all products and customer segments. The modest favorable pricing trends on key commodities like OSB and lumber, and a good mix of general line products, contributed to the impressive gross margin performance in the quarter.
Touching briefly on capital allocation. Wood Products is finishing up the major dryer project at our Florien, Louisiana, veneer and plywood operation, which will reduce operating costs and provide additional internal veneer production capabilities. Our spending related to re-commissioning LVL production at the recently acquired Roxboro, North Carolina EWP facility is underway and we expect to have LVL shipments from Roxboro to customers late in the third quarter.
We have also completed a number of smaller growth and cost reduction related capital projects in both Manufacturing and BMD that are showing encouraging results. We will continue to look at acquisitions when we believe opportunities that help us create long-term shareholder value.
We did not have any share repurchase activity in the second quarter. As a reminder, we have 1.1 million shares remaining on the 2 million share repurchase program authorized by our Board in February 2015.
Finally, we remain committed to maintaining a sound balance sheet and financial flexibility. We expect to manage towards our gross debt to EBITDA target of 2.5x over the near term.
Wayne will now walk through 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. Over to you, Wayne.
Thank you, Tom. I’m on Slide 4. Wood Products sales in the second quarter, including sales to our Distribution segment, were $346 million, up 2% from second quarter 2015. Wood Products reported EBITDA of $31.1 million, down from the $34.1 million reported in a year-ago quarter, principally because of lower plywood lumber sales prices, as well as higher OSB costs used in the manufacture of I-joists. Higher EWP sales volumes, particularly with the addition of the Alabama LVL operation, contributed incremental EBITDA, which offset much of the negative price variances from plywood lumber and purchased OSB.
BMD’s sales in the quarter were $850 million, up 12% from second quarter 2015. Sales volumes were up 13% and pricing was down 1% in BMD. BMD’s EBITDA increased $10 million from the comparative year quarter, driven primarily by a higher gross margin of $18.8 million, including an improvement in gross margin percentage of 100 basis points. BMD’s selling and distribution expenses increased $7.7 million with higher sales activity levels.
The Corporate segment reported negative EBITDA of $7.1 million in the quarter, up $1.3 million from the $5.8 million reported in second quarter 2015, primarily due to higher incentive compensation cost.
Turning to Slide 5. Our second quarter plywood sales volume in Wood Products was 378 million feet, down 33 million feet or 8% from second quarter 2015. The $271 average net sales price for the quarter was down $31 from 2015 second quarter. Of note, the $271 average was a $10 sequential improvement from the first quarter of this year, representing the first positive quarterly sequential comparison since third quarter 2014.
And North American industry operating rates for plywood continues to be negatively impacted by imports of plywood from South America and decreased exports from the United States, driven by the relative strength of the U.S. dollar. We expect to manage our plywood productions and demand again in third quarter with an emphasis on gaining additional value from using our veneer to produce engineered wood products.
The new plywood capacity being built by private equity investors in Mississippi has started initial commissioning work and may ship product later this quarter, which could put pressure on pricing. Plywood pricing in the first several weeks of the current quarter is up about 10% in the west and flat in the south compared to second quarter 2016 averages reported by Random Lengths.
We are about evenly split on our sales volumes between the west and the south. As a reminder, our plywood pricing fell from $302 in second quarter 2015 to $282 in third quarter 2015, so we should face less of an earnings comparison headwind this quarter on plywood pricing.
Turning to Slide 6. Our second quarter sales volumes for LVL and I-joists were up 33% and 14% respectively compared with second quarter 2015. Adjusting for the sales volumes attributable to the acquired EWP locations, our LVL volumes were up 11% and I-joists were up 3%. As we continue to increase the production of Boise Cascade branded LVL at the two acquired facilities in the third quarter and we shipped incremental customer order activity to the most logical production and shipping points, we won't be isolating acquisition impact on EWP volume comparisons in the coming quarters.
LVL pricing was up 2% while I-joists sales price realizations improved 3% from second quarter 2015. We did announce an EWP price increase in the west unionized states in Western Canada in the second quarter, which we would expect to have a modest positive impact on our overall EWP realizations as we move through the third quarter.
Moving to Slide 7, BMD’s second quarter sales were $850 million, up 12% from second quarter 2015. By product area, BMD’s sales of commodity products increased 12%; General line products increased 10% and EWP sales increased 13% in BMD.
The gross margin percentage for BMD in second quarter was up 100 basis points compared to second quarter of 2015, driven primarily by favorable price trends for OSB and lumber during the second quarter 2016, as well as stronger margin contribution within our general line products.
On Slide 8, we set out the key elements of our working capital. Company networking capital, excluding tax items and accrued interest, increased $9.3 million during the second quarter. Inventories increased with higher seasonal sales activity, largely offset by higher accrued liabilities. As a reminder, this statistical information filed as Exhibit 99.2 to our 8-K has 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 $14.9 million in second quarter. We reduced our outstanding revolving credit balance to $45 million at the end of the quarter, which was $10 million lower than the March 31 balance. We ended the quarter with total available liquidity of $415.2 million, which reflects the $20 million increase in our bank line commitments, the $370 million in a higher borrowing base collateral level.
Our gross debt to EBITDA was 2.9x at June 30. As Tom mentioned earlier, we expect to manage our balance sheet toward our gross debt to EBITDA target at 2.5x during 2016 and 2017. I would note our effective tax rate in the second quarter was 35.8%. We would expect a full-year tax rate to fall between 36% and 38%.
Tom, I will now turn it back over to you.
Thank you, Wayne. The consensus estimate for 2016 U.S. housing starts has declined modestly to 2.1 million starts from the earlier consensus of 1.23 million. The year-over-year growth in housing starts in the first half of the year has essentially all occurred in the single-family arena, which uses about 3x as much wood per start compared to multifamily starts.
The mix of starts and the resulting impact on installed square footage is an important variable for our revenue growth in EWP and Distribution. The pickup in single-family construction this year has been encouraging as it has created a more favorable demand backdrop than indicated solely by looking at the change in total housing starts.
We continue to believe that demographics in the U.S. will support a return to normalized housing starts of 1.4 million to 1.5 million starts. I won't cover the last section of the outlook slide as it is the same operating plan we have laid out now for several quarters. The four sub-bullets are really about us executing effectively against the market opportunities in front of us.
I want to thank our employees for some really good work on controllable factors in the second quarter. There is good momentum on a number of initiatives and I am confident there is more we can accomplish in the quarters ahead.
Thank you for joining us on our call this morning. We would welcome any questions at this time. Operator, would you please open the phone lines?
My pleasure. [Operator Instructions]. Our first question comes from the line of Mark Wilde with BMO Capital. Your question please.
Yes, just a question on engineered wood. If we think about, sort of, picking up the GP assets, and I’m sure because you were already a big player in that market, there are probably some wins and losses from an existing customer base. Wonder if you could help us balance that, and then also perhaps talk about any potential volume gains you’ve had from new business wins, or how they might roll in, if indeed you’ve had some?
Mark, this is Tom Corrick. I would say that the situation in the eastern half of the United States, partially driven by the acquisition, has been pretty fluid and we’ve had some wins and we’ve had some losses and I think we’re still kind of assessing how all that comes together. Overall though, I would tell you that the transaction has been very favorably received by our customer base and we’re pleased with how its proceeding but I would emphasize that it remains fluid.
Okay. And then, Tom, if I go back in time, you guys have pointed to a mid-cycle EBITDA number of about $310 million. Is that still a good number in your view?
Yes, Mark, this is Wayne. I think that’s probably as good as any number. And to build up on that is we still think BMD ends up with mid-cycle revenues somewhere in the 3.5% to 4% range and we’ve guided to a 3% EBITDA number as a rough guess which would get $110 million to $120 million in BMD. Corporates probably $22 million to $24 million negative and then the balance is in Wood Products and a fair amount of that was driven by what we were assuming at the time plywood pricing. So of that, mid-cycle number and Wood Products, that would be pushing up in $180 million to $200 million range, we had penciled in about $70 million in EBITDA from the plywood business which we’re clearly not operating at that level today and the pressure on pricing because of South American imports and we’ll see what happens with the startup in the Mississippi plant.
That’s probably the piece that has the most concern at the moment, but the flipside is I think we’re very pleased with what we’re seeing on the GP integration and that should have frankly some integration benefit and probably push the BMD number up closer to the $121 million, $125 million. So I think that $300 million, $310 million is still a reasonable number to think about.
But it would take some recovery in plywood.
That's helpful. Can you just update us, Wayne, on what you’re seeing in the plywood market? I mean the Brazilian real has strengthened. Is that taken any pressure off the market? It seems like if we look at the trade data, we’re still seeing a lot of volume flow into the U.S.
Yes, I think, unfortunately the latest numbers I have are as of May, but if you look at May year-to-date, the shipments into the U.S. out of Brazil are up to May’s number that was the high point at 60 million cubic meters which if you translate that, that’s about 66 million square feet, and it’s 30% of Brazil’s exports. It wasn’t that long ago back in 2014 that the U.S. was only getting about 7% of Brazil’s exports.
The good news is I think a lot of the domestic supply has adjusted to that reality and probably in the near-term more concerned light third quarter and certainly seasonally as plywood weakens in the fourth quarter, we’ll see what pressure the addition of Mississippi plant causes and how many shifts they decide to run. But seasonally we’ve had some firming in pricing and certainly the first start of the third quarter has been pretty good.
And less pressure of the exchange rate on the Brazilian currency has been in the low 3s at the 3.3, 3.4 kind of number. They seem to be much more sensitive to price, so it’s - the situation is improved from where we were six months ago.
This is Tom, Mark. I would add that I think we’re seeing more seasonal effects right now and it feels like the impact of the Brazilian fees has been pretty well absorbed and factored into the pricing in the marketplace.
Okay. All right. Last question I had was just that the drop through in distribution from the incremental sales was bigger than we would have expected. Can you talk to that a little more?
Mark, this is Nick Stokes. Good morning.
Certainly the quarter was good on a lot of fronts. As you recall, the first quarter finished with some good momentum that carried us into that. The seasonality kicked in. We had a nice mix of products in terms of EWP general line and the commodities. We’ve had some moderate tailwinds both in wood and steel on the commodity piece. And it had a healthy mix of direction warehouse, and so if you think about that from a modeling standpoint in terms of our margin, I’d just encourage you to think about what we’ve done historically and the range historically and that could be the best guidance you could use there. But we were pretty happy.
Well, we were pretty pleased too as well.
Let me just say Mark—yes, we are not expecting a 11% incremental on sales and we historically guided into the 4%, 4.5% range. And as Nick said, we had a number of things that contributed to margins. If you look at the full year average for ‘15, we were at 11.6% and in the second quarter of this year, we were 12.5% and we’re at 12% year-to-date. And as Nick said, there is a couple of things that are contributing to that that should make it modestly better than ‘15 but it’s certainly not anticipating the 12.5% to hold as we move into the second half of the year.
Okay. That’s great. I'll turn it over.
Thank you. Our next question comes from the line of George Staphos with Bank of America. Your question please.
Thanks everyone. Good morning. Thanks for all the color so far. My first question is just want to piggyback on what Mark was getting at. So would it be fair to - well, let me back up. Is there a point for the real that you would see more pressure from imports, given your experience and given your people in the trade, or did I understand you to say that more or less you think you’ve absorbed and we have absorbed as much as can be exported here, given the obvious other channels that the Brazilian product goes into?
No, I think - this is Dan, George. I think that…
Good morning, Dan.
Between 3 and 4 real to the U.S. dollar I think that the U.S. still provides an attractive opportunity for them. I think that - but obviously as you get closer to 3, it becomes less of an attractive opportunity and so there is capacity that’s left to come here but I think they look at Europe, they look at other markets and make their best decisions. So that’s one thing to think about. And the other thing to think about is real has moved down fairly sharply from the beginning of the year and I don’t think we know at this table how long the lag is on that. You’ve got 30 days on the water. You’ve got the manufacturing schedules, so we may - if it stays at the level it’s at and Europe remains an attractive market, you may can see less coming this direction.
Sure. Fair enough on that. It sounds just again that the mill that’s starting up later in the year that’s more your concern at this juncture in terms of what could…
It’s certainly a concern, yes. If real weakens, then we’ll have two things to worry about.
Yes, George, little more on the mill in Mississippi. The local mayor’s office does a weekly update and they’ve started running veneer blocks. They are not heating them yet but they have started running various machine centers and doing checkouts. So by the end of the third quarter, I would expect them to have volume in the market.
By end of third quarter?
Yes, sometime in September, if not, late August.
Okay, thanks for that, Wayne. And then one question maybe for Nick. Can you comment to what you see as inventory levels of EWP in the channel whether they are relatively low, relatively normal? And, Wayne, earlier in the year, you were saying, I think, much more significant growth in EWP volumes, what in your view caused that looking back in time now with benefit of hindsight, and should we think more or less from here on now that - assuming there is no inventory change that occurs that EWP will move more or less in line with single-family?
Yes, George, this is Wayne. Let me touch on both points. You may recall in the first quarter, our manufacturing business, one, because of weakness in plywood and others trying to make sure that we had good service programs, we did offer dated terms between manufacturing and BMD and some of our other independent wholesalers and put more product out into the market in first quarter, which caused the volume to manufacturing to be up relative to the housing starts. I think that’s part of the reason adjusting for GP you see 11% on LVL and low-single-digits on I-joists is part of that was frontloading inventories in March ahead of the spring building season.
So as we get into the back half of the year, right now I’d say that inventories in the field are very normalized relative to demand levels and I would expect third quarter and fourth quarter, our EWP numbers to be more in line with what you’re seeing on single-family starts.
And again we’re going to have a tougher time in third and fourth quarters sorting out the impact of the GP facilities and isolating that as we ship orders to Alabama and North Carolina with the new facilities and potentially away from Louisiana to capture freight and operating synergies. But the underlying base demand I think will be very much in line with single-family starts.
Okay. Two last ones then I’ll turn it over. Thanks for the input so far. One, can you comment a bit more on what discrete cost reduction efforts you’ve been working on and what your team has been enabling, Wayne? What the benefit of that is either in the quarter or the year? And then switching gears back to EWP, we talked a little bit about this last year whether some of the fire codes have had any kind of effect on EWP’s penetration into the market versus solid dimensional lumber had. Do you think that’s more or less a done deal and EWP now is - will grow more or less again in spite of any of these concerns that are out there? Thank you.
This is Dan. On the cost reduction side, I don’t know if there is any one thing that really stands out. I think it’s just part of the ongoing effort to improve things. As an example, TC mentioned that with the start of a new dryer in Florien, we’re going to not only have more volume, we’re going to have different cost structure. The biggest issue that I think that relates to in that area is really the shift of products - the shift of veneers into EWP and the decisions - ongoing decisions to cut back our plywood production as we got near our cash cost position.
So it’s really, we think about our business being marketing veneers and so it’s finding better homes for the veneers and I think the guys did a really good job in the second quarter.
As far as the fire codes, I’d give you my thought, then I’ll let Tom talk about, but I think we continue to see that as a challenging market issue and we continue to develop products to combat that. I do not think it’s going away and I don’t think it is yet stabilized but Tom your thoughts.
On the fire issue, George, frankly the bulk of the states that need to implement the code change have not yet done so, so there is going to be more impact from it. The relative number of basements is not a huge number, so that the total I-joists volume is not massively impacted by it and the key is having solution that available that keeps you from losing the rest of the EWP business in the house. And so that’s really been our focus there, but that’s not over with but I would not say it’s an enormous factor an I-joist consumption but it’s certainly a negative factor.
A couple of things I’d add on Dan’s comments on the cost side. I think if you compare the fourth quarter where our downtime in veneer on plywood cost us money, the types of downtime we took in the second quarter actually enhanced margins. So that was - I think the team did a really stellar job. The other place I’d say that based on some of our past communications is we’ve made some very, very substantial progress addressing the issues we had in the Eastern region that we talked about a year ago.
Understood. I will turn it over there. Thank you.
Thank you. [Operator Instructions]. I’m showing no additional questions over the phone lines. I would now like to turn the call back over to Wayne Rancourt for closing comments.
Okay. Thanks everyone for joining us. I appreciate the time. And, Brian, thanks for hosting. We will talk to you all next quarter. Have a great day.
Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may all disconnect. Everybody have a wonderful day.
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