Boise Cascade Company (BCC) Presents at RBC Capital Markets Global Industrials Conference

| About: Boise Cascade (BCC)

Boise Cascade Company (NYSE:BCC)

RBC Capital Markets Global Industrials Conference

September 8, 2016 11:00 AM ET

Executives

Wayne Rancourt - Executive Vice President, Chief Financial Officer and Treasurer

Mike Brown - Wood Products, Vice President of Operations

Analysts

Bill Hoffmann - RBC Capital Markets

Bill Hoffmann

And we have Boise Cascade Corporation and we have got Wayne Rancourt, Chief Financial Officer joining us this morning and Mike Brown from the Wood Products Division.

And I think the - what I would like to do is maybe start off a little bit of macro discussion, but also maybe just Wayne if you want to kind of introduce Boise is one of the more unique forest products companies we cover with a distribution and the solid wood business that we think provides quite an advantage especially in the middle of what we feel like as a decent housing recovery over the next couple of years.

Wayne Rancourt

Yes. So let me just start with a quick introduction of Mike. Mike has been with the Company a number of years. He has worked when we had international operations around Brazil, has run our operations in the South and Southeast and he is now responsible for all of the wood products manufacturing.

Boise Cascade is somewhat unique and that we have two main business lines, one of them is wood products manufacturing, the two major core products are plywood which is a veneer-based material and engineered wood which in our case refers to laminated veneer lumber and wood and I-joists where we use laminated veneer lumber principally in the flange of the eye and then the vertical part of the eyes may not have OSB.

And the engineered wood products are really a substitute for dimension lumber and offer a lot of advantages to builders in terms of strength consistent quality and length and cost of installation. But we really grew that business out of the veneer based plywood business.

So we’ve managed to leverage those two and you go through some of the questions I think Mike will be able to describe some of the operating advantages. And then uniquely we have a very large wholesale Building Materials Distribution business that focuses on products that require two step distribution.

So we buy from the manufacturers all of our distribution sites across the U.S. are served by rail and we bring in large rail and truckload quantities and break those down and sell them to other distributors. So people like Builders FirstSource, BMC, The Home Depot and then those distributors end up redistributing the products largely to home builders and repair-and-remodel contractors.

And that business for us today will be over $3 billion in revenues, the wood products business will be somewhere around $3 billion, $4 billion and importantly there is almost $600 million of intercompany sales between the manufacturing and distribution business and it’s the distribution business is responsible for about two-thirds of the engineered wood products that we manufacture getting to market. So there’s a pretty close tie between the two businesses and that unique vertical integration nationwide is really what makes us somewhat unique in the marketplace.

Question-and-Answer Session

Q - Bill Hoffmann

Correct. Okay. Thank you. Let’s talk about just sort of some of the macros then we’ll get into some of the segment details. Housing starts this year are up nicely. I think probably less people thought originally and but we’re on a nice pace. As you look into 2017, I guess the forecasts are anywhere from $1.3 million to some higher, but like that here kind of what - how you’re thinking about next year and sort of how you are planning in your business for the next let’s say 2017 and 2018 years?

Wayne Rancourt

Yes, we feel pretty good about the outlook for 2017. 2016 as you said has been a mixed bag in terms of the total start number that’s been a little bit slower than people thought. I think we’re probably going to come in [180,000 into 190,000]. But the important part for 2016 as most of the increase was made up by single family start. And we haven’t really seen much growth in the multifamily arena. And single family uses about three times as much building product material as a multifamily start just because you don’t have shared walls and ceilings and the square footages are larger.

So as we look to 2017 and 2018. We think we’re probably going to continue on that pace where it’s 75,000 to maybe 80,000 incremental starts if you listen to what the homebuilders are saying around labor availability, lots and frankly how they’re trying to manage margins. We have a hard time seeing how we’re going to build 125,000 to 150,000 incremental starts in 2017, but we think the mix will probably again favor single family a little bit.

So if we get 8% growth in 2017 and the similar number in 2018 that’s actually a pretty good outcome for us as opposed to seeing a 150,000 incremental starts a couple of years in a row and then turn around and have a down cycle we’d rather see a more protracted up cycle.

Bill Hoffmann

Yes. I mean it sounds like the major builders are trying to manage this cycle a little bit better than maybe last time? Just thrown up all these houses, but just all the demographic numbers really talks about we’re still way under the demographic need is what we are – we think it’s happening.

Wayne Rancourt

Yes. I think what you’re seeing is the millennials have been later to marry, later to have children then what’s happened in previous generations. And anecdotally I can tell you from a number of conversations. I think a lot of the millennials want to spend their 20s and early 30s in a major urban environment, access to public transportation and all the excitement that that entails and in their early 30s are preparedly to get married and think about moving to the suburbs and having kids. But it’s definitely five to seven years later than what we’ve seen in prior generations.

Bill Hoffmann

And what do you think about the interest rate environment in fact on mortgages, I mean you seem to be in this sort of lower for longer. Do you think it just perpetuates this cycle for that longer period of time?

Wayne Rancourt

I think there’s a decent chance that the Fed moves this month certainly by December, but my personal view is I don’t know that we’ll see a parallel shift in the curve. I don’t see a lot of inflation pressures. There’s a little bit that starting to show up on the wage front. But I think the tenures going to remain relatively low for a longer period of time just given what’s going on with interest rates globally and that’s favorable for mortgage rates.

So I don’t see anything on the mortgage rates and that’s likely to slow down the recovery. I think it’s more just propensity to buy and frankly behavior from the millennials and then we’ll see what happens with the baby boom generation in terms of what they want to do for a living style as they age.

Bill Hoffmann

They want to sell.

Wayne Rancourt

A lot of them want to sell and they frankly want to do, in some cases the same thing as the millennials which get to an urban environment where they don’t have to worry about transportation, where they have ready access to restaurants and entertainment and they don’t have to upkeep a yard. So my personal opinion maybe that over the next five to seven years you see a lot of the properties that are held by baby boomers getting converted and that maybe where a lot of the supply side comes to take care of the millennials that have decided to have kids and go to the suburbs.

Bill Hoffmann

Okay. Just from a corporate strategic standpoint some of the things that you’ve done made some acquisitions on the plywood side, added some more veneer capacity for the engineered wood products for the more recent acquisitions. How do you think about through the next steps for Boise from an acquisition growth standpoint?

Wayne Rancourt

Well, I think on the wood products side, we’re still digesting what we’ve bought from Georgia-Pacific. We picked up an engineered wood mill in Alabama and one in North Carolina, and the one in North Carolina have really been ideal since 2010.

So Mike and his team has been in a fair amount of focus right now, putting capital into the North Carolina facility and re-commissioning the laminated veneer lumber and making some pretty dramatic improvements in terms of throughput and quality on the I-joists line there. And that will really carry through the balance of this year with a view towards out in that North Carolina facility up and fully commissioned as we get into the spring building season in 2017.

So internally they’ve kind of got their hands full. I think we could still do tuck-in acquisitions if we found a family that wanted to sell an operation that made sense and integrated with what we’re doing on the near side. I think we could do that in wood products. But major focus has been looking at acquisitions that would either be adjacent to complement our footprint in our wholesale distribution business. And that’s really been a focus. The last several months is trying to figure it out opportunities in that arena.

Bill Hoffmann

Great. I was going to say there seems to be quite a bit of activity and consolidation in the distribution side as well. So what else is left out there? I mean it seems like we’re getting down to maybe the top five or six companies in distribution side and then there’s a lot of small ones?

Wayne Rancourt

In the wholesale side, a lot of the guys we compete with are smaller independent guys or regional guys. The large national guys Weyerhaeuser has been contracting its footprint to a certain degree. BlueLinx has had some issues and is contracted its footprint. Cedar Creek which is owned by Charlesbank P firm out of Boston has been growing mostly in the Midwest and through Texas and well down to East Coast.

But a lot of the people we compete in the wholesale arena are smaller players and a lot of them are very good regional guys. So we think there is an opportunity in a number of geographies to increase our representation. We get to all of the major MSAs today, but in a lot of cases that’s long for calls.

So there are places we could definitely fill in. It’s a little tougher to gain synergies on the distribution side compared to the manufacturing side because if you take one plus one in a market and then for a significant players.

A lot of times the vendors want to do a representation in the market and customers want multiple options on places to buy, but product line extensions and the mill work and doors looking at an adjacent industrial markets and again growing the product set. We think there are still considerable headroom in distribution and some of the things we do from a business model standpoint.

We think would be very applicable to the other product lines. And so we view that as a much more open ocean than say trying to consolidate the plywood business and engineered wood business. Those two areas are pretty well consolidated at this point.

Bill Hoffmann

Right. Okay. And then just from a capital structure standpoint you try achieve that stretching your balance sheet for a bigger acquisition versus trying to do these more tuck-ins assumption is more the tuck-in type strategy as you’ve done sort of historically.

Wayne Rancourt

Yes. I think today and we just refinanced our senior notes and stretch the maturity out to 2024. So we’ve got a pretty good maturity profile. We’re running right now on a gross debt basis somewhere close to three times EBITDA.

Our target would be to get down to 2.5 and our preference would be to get there by continuingly grow the earnings. But in terms of maturity profile, liquidity and the balance sheets are really in good shape and we could accommodate $100 million to $150 million acquisition.

Pretty comfortable on our balance sheet as long as it brought a reasonable level of free cash flow with it. I think if we did anything transformational that’s 500 million to 800 million or something of that scale then we would definitely need to look at using an equity component as part of the transaction.

Bill Hoffmann

Okay.

Wayne Rancourt

And again that would depend on where our share price was and if we thought that acquisition afforded a reasonable amount of synergies to make it make sense for our shareholders.

Mike Brown

Right. And the bottom line is it’s a good place to be looking at a positive fundamental so.

Bill Hoffmann

Oh, yes, it’s looking out at…

Wayne Rancourt

Looking out at 2017 and 2018 and we think in the 2019. As far as the economy stays on track and continues to grow it to the 2.5%, we think the housing market will continue to recover again at that 75,000 to 80,000 unit level per year and we think we’ve got several years of runway for us to go.

Bill Hoffmann

Excellent. Thank you. Let’s move the wood products business and maybe you like to give a chance to sort of help us out here. Boise historically is a very large player in the plywood business, but also a very significant player engineered wood products. The GP acquisitions really helped to add some capabilities there and that segment is also starting to finally recover.

We’re still I would say ways from being fully recovered there. So maybe if you can just talk about each segment for a minute and let’s start with the plywood business just because of the impact of the dollar and it’s really affected the trade flows and sort of where you see that developing from here.

Mike Brown

Yes. I might go at this sort of on a regional basis because there are certain regional differences. So if we look at the Southern U.S. where we have a considerable footprint in terms of plywood. About half of our production is in the Southern compound of the operations.

Of course we’re dealing with the imports of fuel primarily Brazil, but also from Chile. Fundamentally the plywood market I think looks like it’s going to stay more or less where it is for a while. The underlying reasons for the rather large increase in imports over a last few years basically look like to me anyway they’re going to be the same moving forward.

Exchange rates as they relate to the strength of the dollar relative to Brazil and we’re in that sort of around 3.2 area. Who knows what will happen in Brazil, but it doesn’t seem to have any fundamental differences to us at this point in time that see going in either direction very far.

The demand in Brazil domestic, demand again is very low compared to say five years ago. Ocean freight rates continue to be very low. And although the U.S. plywood market in the south is depressed in terms of realization of prices compared to say like 2014. If you look at the return to the Brazilians as an example they’re still making very good money. And so we really don’t see much upside in terms of plywood realizations in the South.

As it relates to the South of course plywood probably get reprimanded from my plywood sales manager, but it’s sort of a byproduct to us. And we run our integrated Southern operations where really we’re veneer producer. And we try and push as much of the veneer as possible into our engineered wood products and if [indiscernible] expression what’s left over goes into plywood. So we have integrated operations in the South with EWP is one of our strengths. And we can sort of essentially hold our line against the current market situation as long as necessary because of that integration.

If you look at pricing in the Pacific Northwest on plywood it’s showing a bit of an uptick of recent times. And of course you’ve got the separation between the Southern Yellow Pine composite and the Western composite pricing. You would think that that might be a cause for some upside movement on pricing from the South, but with the imports not so much. I don’t think.

And in the Northwest while the pricing has moved up and demand is reasonably good. Again yes the benefit there is primarily around the integration with engineered wood products where we have a consistent customer base that takes plywood and where if necessary of course we’ll also wind back our production a little bit to ensure that we balance supply and demand

On the EWP side, well we’ve had a consistent increase year-over-year in terms of demand both in the South as well as the West. I think that will continue as Wayne has already said it’s basically correlated with housing starts as it relates to specifically the acquisitions in the South. We have a plan – basically the remainder of this year and threw into 2017 to re-commission the assets that were idle.

And that will give us plenty of upside or headroom as it relates to demand. We have a very high level of self-sufficiency in terms of the new supply. So we see basically particularly in the South as demand increases for engineered wood products, we will be in a position to be able to respond. And really don’t see any reason that we should have any full starts if you want to put it that way with respect to supplying how principal customer to BMD.

In the Pacific Northwest and the operations that are in Oregon. We’re starting to integrate our Inland or that would be Northeastern Oregon and Washington operations we really have two plywood mills into our EWP operations in Western Oregon. Since we are putting place the same business model as we’ve had in the South for a number of years. EWP demand in the West continues to increase and it will be running at a relatively high operating rates we think next year.

So on both those fronts plywood is pretty much where it’s going to be we think for a while EWP has some upside for sure in terms of demand and we hope ultimately in terms of pricing and the integrated components of veneer production I think give us some strength as it relates to being able to whether the down side of the plywood market in the South for a while.

Bill Hoffmann

So if you had to sort of characterize an operating rate rise 2016 versus 2015 and maybe 2017 and obviously regionally here? Where are you about at this point?

Wayne Rancourt

Well, historically over the last three years we’ve operated around 70% to 75% total. Of course we added some significant capacity in the South over the last 12 months. So if you look going forward and we bring on additional price capacity in the South really like change much in terms of operating capacity. If housing starts do what we’re predicting they will do.

We’re talking at three, four, five years out. We may get up above 80%, 85% operating capacity as we move out into the 2018, 2019 or even further out. So we have plenty of upside and headroom and I think that’s one of the advantages that we have for our customers and their customers you know supplying our BMD also the dealers as well as the homebuilders we have I think put in place a good strategy to allow us to accommodate their needs as the housing start recovery continues.

Bill Hoffmann

The operating rates you see in the Pacific Northwest are higher than that - sort about the same.

Wayne Rancourt

We’ve put in place some process improvements Bill that I’d say allow us to have an operating rate in the Pacific Northwest that is fluctuating around 80 odd percent.

Bill Hoffmann

Okay.

Wayne Rancourt

Okay. It could be a little bit higher depending on the seasonality of course I mean that’s one of the tricks in our business where you have much higher demand in the summer period basically. And so we do have on occasions and much higher average – average higher operating rates on the summer compared to the annual average.

Bill Hoffmann

Yes and Mike was referring to EWP operating rates.

Mike Brown

I think on the plywood side what you’re seeing is because of the imports and market conditions what we’ve been doing is internalizing more of the veneer into EWP so if you look at our overall plywood sales for this year. I’d anticipate we’re going to be half about 8%, which is if you look at the change in imports between 2014 and 2016 it’s about equal to the percentage change North America that’s now being served by imports.

So, now if you go back to late 2014 and early 2015 we had a lot of contribution in the veneer whether that was going in a plywood or in the EWP and in a couple of mills that contribution margin has get narrowed up enough. So we’ve backed off on some of our external veneer purchases and started to internalize more of our veneer production and frankly pull supply out of the plywood side to try to get the supply and demand balance in the plywood markets back in better shape and in the last several quarters we’ve seen plywood stabilize.

So we’re still running the veneer operation and the plywood operations probably in the high 80s in terms of operating rates, we’re above 90, but more of the veneer is getting targeted into EWP and less into the plywood market. So, as I said taken about 8% of our sales volumes off in plywood to try to balance the market.

Bill Hoffmann

So the balance on the veneer/EWP side of the business, are you still buying externally veneer down in the south and when you get Roxboro up will you continue to buy external veneer or?

Mike Brown

Yes. For the time being Bill, our strategy has been for many years now that we would continue to have an external supply.

Bill Hoffmann

Okay.

Mike Brown

I’m sure you’re aware, we’ve spent quite a lot of money over the last five, six, eight years building veneer production capacity in the south. We just put it in a really good position going forward. But there’s also an advantage of having some continued external supply in terms of where it comes from geographically, not all wood is the same. So there are some strength characteristics that we like to take advantage of on occasions and so it’s a balancing act.

And these days, I point to another one of our strengths in the south, particularly the Southeast as we run all that mills as an integrated unit, the North, South Carolina mills as well as one in Alabama and the three in Louisiana willing to move together in a linear programming model to ensure that we are optimizing the overall result for the business unit, not one particular mill. And that is as Wayne pointed out ultimately we like to push a lot more veneer into EWP because even after taking into account the high manufacturing costs, the return is substantially higher compared to plywood.

Bill Hoffmann

Great. And there is also talk that with the softwood lumber agreement issues, that we may start to see a higher tax coming out of Canada which could help the EWP business, how you feel about that?

Mike Brown

Well, I feel about that. Well, I guess at the end of the day if it’s good for free trade and it’s good for the ultimate customer. I think that’s a good thing. Lumbers in many respects, obviously yes in direct competition for some of the products that we produce. But as Wayne, I think mentioned in sort of his introductory remarks the products that we produce give advantages out of the lumber.

Lumber pricing in the south has been very low for extended period of time. If it recovers a little it’s still actually cheaper than buying an I-joist. So we don’t really go to market based on competing on price. So an uptick in the cost of a 2/10 or 2/12, well that may have some impact and sort of indirectly, it really impact, we don’t believe the demand for our products.

Bill Hoffmann

Okay. Thank you. I’m going to ask…

Unidentified Analyst

[Question Inaudible]

Mike Brown

Well. There’s a customer preference. I mean I think this is probably historically based. We do have two mills now that make some solid-sawn, flange I-joists facility in New Brunswick in Canada and the facility we bought from Georgia-Pacific in Roxboro, North Carolina.

Historically they had made solid-sawn and flange I-joists primarily. They were servicing particular markets that had a preference for that based on your historical desires or put it like that from a sheer perspective of performance essentially one can substitute for the other. And so it’s not a question of whether one is better or worse, it’s really just the customer preference.

I can’t give you a really good number on the percentage in the U.S., essentially all our production is LVL flange, okay, and primarily also our principal competitors in a similar position. If you go north of the border to Canada of course where they have black spruce and a lot of it.

They’ve been taking advantage of the strength characteristics of that species and the available fiber for quite a long time. And so I think from that perspective, from the Canadian manufacturing perspective this is much driven by the availability of fiber and cost of that fibers anything else.

Bill Hoffmann

[Indiscernible].

Unidentified Analyst

[Question Inaudible]

Mike Brown

Yes, in fact, I would say that it’s really not a question of whether we have enough money or enough know-how. It’s a question of getting the right people at the right time to do the right things in those facilities particularly when they’ve been idled for an extended period of time.

Yes. Obviously there are some demands around having the availability of enough cash which is not a problem for us, but then it’s the engineering components of what we need to fix and the availability of the people to run the equipment after we bring it up. And so that’s why we’re taking sort of a measured approach to how we’re going to bring the capacity back online.

We’re already in a position to start-up the first of the two places that we’re going to re-commission at Roxboro and so later this month we will be producing Boise Cascade VERSA-LAM at Roxboro. And as you know we purchased that facility only few months ago. And we’ve had a team working on that [Chris].

The same thing with the I-line and I-joists assembly line. We’ve converted it to make BCI’s that would be LVL flanges and I-joists in that particular machine center will be coming online probably in October. It’s running still producing sold so on, but we’re just finishing up the changes to be able to make LVL flange. But even having spent all the money at the right engineers, we need the right people to manage the facility.

And that’s really across our manufacturing division I would say. It is always been a challenge. For the last two years the availability of folks that have historical expertise and being able to get them to the right mill at the right time. It’s just the industry is has a lot of folks that are nearing retirement age. And so we continue to look for where we can hire more and better well qualified individuals to run our facilities.

Unidentified Analyst

[Question Inaudible]

Mike Brown

Well, I guess Wayne and I could both answer this and we have probably similar views. I was basic is a very fine product and they continue to make inroads into plywood into the historically plywood market sector. Because they continue to innovate and press forward, at the same time there is a preference and a code requirement in some places for plywood.

I guess that is a help to us, but the overall market size over the last year or so has started to expand again. So from our perspective, it’s not a question of whether we’ll be unable to sell the plywood that we produce is more a question of the overall market size, but I was pleased being successful. They were very good at their job and I think they’ll continue to strive to take more market share over time.

Wayne Rancourt

Yes. I think the big thing with LSP is its more residential construction product than plywood is today, plywood probably only 20% that ends up in new residential construction and OSB has won the lion share of that. So if you look at the growth rates in the second quarter for example OSB was up 8% year-over-year in the second quarter and plywood is up 4%.

But there are certain characteristics to the plywood that for the end users where it’s remained, it’s still the preferred product and particularly if you have anything where the products going to get wet and you face swelling issues, OSB tends to swell on the edges and not return to the original dimensions and plywood tends to swell uniformly and when it dries contract uniformly.

So if you’re industrial printing and packaging or if you’re using it under tile like in a sub floor. A lot of the advantages in plywood persist because of the ability to be stable and OSB has done some things on edge treatment and other things to improve, but if you get it on a job site and somebody cuts off the coatings that have been put on the edge to deal with the moisture you lost it and you may find you got a call back and so there’s still some places where plywood makes sense.

Mike Brown

Yes, and in – like commercial applications fire treated plywood in hotels and the like that’s still a large component of the demand.

Unidentified Analyst

[Question Inaudible]

Wayne Rancourt

Did imports back to a normalized level and if plywood returns to 280, 285 price level from 270 today. Then sourcing more veneer outside or frankly producing more veneer internally and turning it into plywood. If the margin to get reestablish we can clearly ramp back up to 1.6 billion we don’t necessarily see it as growth market but we would prefer not to shrink the plywood as long as there’s positive EBITDA margin and we maintain the plywood and then grow that EWP on top of that.

Unidentified Analyst

[Question Inaudible]

Wayne Rancourt

I think if you look at the single family homes that are being built there is positive penetration gains on the LVL. I would tell you I-joists are slightly negative, if you could look at the share raised for us I think part of that is in response to the pricing on dimensional over the last couple years.

And that varies a lot on whether you are seeing a start in the South where it’s [indiscernible] and you don’t have to raise sub floor, but I-joists are probably going to grow pretty much in line with starts maybe a little bit behind just because I think the South, Southeast will continue to grow at a faster rate than say the upper Midwest.

But the LVL continues to see volume gains and I think that to your point is more open rooms, higher ceilings. And just construction certainly in cycle time with labor availability. So we think engineered woods going to have a bit of a tailwind because of the labor issue.

Unidentified Analyst

[Question Inaudible]

Wayne Rancourt

Yes. I think that the thing I would say for our distribution guys is all of the customer facing decisions are made in the individual market and there is a national overlay if you look at how we deal with Home Depot, Builders FirstSource, BMC 84, and the guys international, we have the national overlay, but it’s really a market-by-market decision with similar systems and processes in place.

But deciding pricing, deciding what you’re going to start deciding how the transportation systems are going to work whether you’re doing internal trucks or common carriers or less-than-truckload et cetera. All of those decisions are made locally and having that flexibility to respond what’s going on in the marketplace and frankly have the authority to respond to unique situations. That has been a huge differentiator for us.

I think the guys that have tried to pull cost out by centralizing purchasing or centralizing call centers, determining product stocking et cetera. It’s still a very fragmented market, over half of our customer base for our wholesale distribution business is still smaller and regional independent lumber yards. It’s not the big national guys, the big national guys are only about 25% of our business.

So having that local autonomy is really critical and our guys have executed well if you look at a lot of the management practices that are in place and incentive programs. The friendly internal competition it really it’s more about the people and the culture than it is trucks buildings and product. They’ve got a very unique mentality that’s customer focus and it’s local market focused.

End of Q&A

Bill Hoffmann

Terrific. With that, I want to thank both of you guys for coming out and participating with us. I really enjoyed our conversations this morning.

Wayne Rancourt

I appreciate you guys supporting us and thanks for the invitation to be here.

Mike Brown

Yes. Thank you.

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