Boise Cascade Company - Earnings Call - Q1 2020
May 8, 2020
Transcript
Speaker 0
Good morning. My name is Valerie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Boise Cascade's First Quarter twenty twenty 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.
You would like to ask a question during that time, simply press star and then the number one on your telephone keypad. Questions will be taken in the order they are received. 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 and implied in this call. For a discussion of the factors that may cause actual results to differ from the results anticipated, please refer to Boise Cascade's recent filings with the SEC. It is now my pleasure to introduce you Wayne Rancourt, Executive Vice President, CFO and Treasurer, Boise Cascade. Mr. Rancourt, you may begin your conference.
Speaker 1
Thank you, Valerie. Good morning, everyone. I would like to welcome you to Boise Cascade's first quarter twenty twenty earnings call and business update. Joining me on today's call are Nate Jorgensen, our CEO Mike Brown, Head of our Wood Products Operations and Nick Stope, Head of our Building Materials Distribution Operations. Turning to slide two, I would point out the information regarding our forward looking statements.
The appendix includes reconciliations from our GAAP net income to EBITDA and adjusted EBITDA and segment income to segment EBITDA. I will now turn the call over to Nate.
Speaker 2
Thanks, Wayne. Good morning, everyone. Thank you for joining us on our earnings call today on Slide number three. Our first quarter sales of $1,200,000,000 were up 12% from first quarter twenty nineteen. Our net income was $12,200,000 or $0.31 per share compared to net income of $11,400,000 or $0.29 per share in the year ago quarter.
Reported net income for first quarter twenty twenty includes $15,000,000 of pretax accelerated depreciation and $1,700,000 of other closure related costs or $0.32 per share after tax due to the permanent curtailment of our I joist production at Roxboro, North Carolina facility. Our operating performance in both businesses was strong, demonstrating the strength of our integrated business model. Our Wood Products manufacturing business reported segment income of $3,800,000 in the first quarter compared to $11,600,000 in the year ago quarter. The first quarter twenty twenty results include the Roxboro previously mentioned charges. Our Building Materials Distribution business reported segment income of $29,300,000 on quarterly sales of $1,000,000,000 for the first quarter compared to $17,500,000 of segment income on quarterly sales of $9.00 $8,000,000 in the comparative year quarter.
Wayne will walk through the financial results in more detail, then I'll come back to provide an update on ongoing business ongoing response to COVID-nineteen impact on our businesses and our outlook before we take your questions. Wayne?
Speaker 1
Thank you, Nate. I'm on Slide four. Wood Products sales in the first quarter, including sales to our Distribution segment, were $320,000,000 flat with first quarter twenty nineteen. As Nate mentioned, Wood Products reported segment income of $3,800,000 in the first quarter compared to $11,600,000 in the prior year quarter. The decrease in segment income was due primarily to accelerated depreciation of $15,000,000 and other closure related costs of $1,700,000 at our Roxboro facility, as Nate mentioned.
Reported EBITDA for the business was $33,400,000 up from EBITDA of $25,400,000 reported in the year ago quarter. Higher EWP volumes and lower manufacturing costs contributed to the improved EBITDA performance compared with first quarter twenty nineteen. Lower plywood pricing was a drag on first quarter twenty twenty comparative performance. DMD sales in the quarter were 1000000016% from first quarter twenty nineteen. Sales volumes were up 17%, while sales prices declined 1%.
The business reported segment income of $29,300,000 or EBITDA of $34,600,000 in the first quarter. This compares to segment income of $17,500,000 and EBITDA of $22,600,000 in the prior year quarter. The increase in segment income was driven primarily by a gross margin increase of $24,600,000 resulting from improved gross margins on commodity products and higher sales of general line products in EWP compared with first quarter twenty nineteen. This improvement was offset partially by a $12,200,000 increase in selling and distribution expenses. The amounts for unallocated corporate costs and other items impacting our reported EBITDA can be found in the tables of our earnings release.
The net of those items was negative $8,400,000 in the first quarter of twenty twenty compared with negative $7,300,000 in the first quarter of twenty nineteen. Turning to Slide five. Our first quarter sales volumes for I joists and LVL were up fourteen percent and eight percent, respectively, compared with first quarter twenty nineteen. Housing start activity was quite strong at the beginning of the year as favorable weather, combined with good economic factors to create robust demand for new single family residential construction. We didn't begin to see much of an impact of the COVID-nineteen induced slowdown in the pace of new single family construction until the March.
We adjusted our EWP mill operating schedules early in the second quarter to be in tune with the changing demand situation and to avoid building excess inventories. Pricing in first quarter for I joists was up 1%, and LVL pricing was down 2% compared with first quarter twenty nineteen. Turning to Slide six. Our first quarter plywood sales volume in Wood Products was three eighteen million feet compared to three thirty six million feet in first quarter twenty nineteen. We were able to push a higher proportion of our veneer production into EWP in the first quarter given the solid demand fundamentals.
Also, the lower volume for plywood sales reflects the sale of the Monitor plywood facility during first quarter twenty nineteen. The $267 average plywood net sales price in first quarter was down 7% from first quarter twenty nineteen. Plywood pricing showed nice momentum throughout most of the first quarter, but Oregon orders began to weaken in March as distribution customers significantly slowed their buying and worked down inventory levels in response to the COVID-nineteen pandemic. Declines in demand led to weaker prices in April. Plywood pricing thus far in the second quarter is approximately 5% below our first quarter twenty twenty average.
Moving to Slide seven. BMD's first quarter sales were $1,000,000,000 up 16% from first quarter of twenty nineteen, with volumes up 17% and pricing down 1%. By product area, BMD's commodity sales increased 11%, general line product sales increased 23%, and EWP sales increased 14%. The gross margin percentage for BND in the first quarter was 12.6%, up 80 basis points from the 11.8% reported in the first quarter of twenty nineteen. Gross margin increase resulted from improved gross margins on commodity products and higher sales of general line products in EWP compared to first quarter of twenty nineteen.
As a reminder, our general line products in EWP that we service through our branches tend to have higher gross margins but also higher associated sales and handling costs. DMD's EBITDA margin was 3.3% for the quarter, up from the 2.5% reported in the year ago quarter. Robust construction activity in the first two months of twenty twenty, as evidenced by seasonally adjusted housing starts of around $1,600,000 drove sharp increases in commodity products pricing that peaked in mid March. However, concerns and uncertainty about the impacts of COVID-nineteen since then have negatively impacted residential construction activity and building products demand, resulting in curtailments of production across the industry and a sharp decline in commodity prices. Current composite panel lumber prices are approximately 15% below the peaks of mid March twenty twenty.
We anticipate that commodity products pricing in the second quarter will remain at current low levels, which will be similar to the price levels experienced in second quarter twenty nineteen. Slide eight shows the roller coaster ride of lumber pricing in the first four months of twenty twenty. Most of the major lumber producers have adjusted operating rates in response to the demand situation, which should help stabilize pricing once end market consumption is more predictable and the supply chain becomes more comfortable establishing inventory positions. On Slide nine, one can see the same pricing pattern for the Random Lengths Composite Panel Index. Again, there have been significant curtailments by many of the OSB and plywood producers in response to downstream supply chain behaviors.
On Slide 10, we have set out the key elements of our working capital. Company net working capital, excluding cash, income tax items and accrued interest, increased $91,500,000 during the first quarter, representing a seasonal use of cash. The seasonal increase in accounts receivable and inventories was not fully offset by the increase in accounts payable. As is normally the case, we also used cash to pay out incentive compensation and customer rebate accruals during the quarter, reducing accrued liabilities. If business conditions remain meaningfully weaker for the balance of second quarter, I would expect our working capital levels to fall by the June and result in additional cash generation.
The statistical information filed as Exhibit 99.2 to our eight ks has the receivables, inventory and accounts payable detail broken down by segment for those interested. I'm now on Slide 11. We finished first quarter with $215,000,000 of cash. Our total available liquidity at March 31 was approximately $560,000,000 which reflects our cash and availability under our committed bank line. We had $440,000,000 of outstanding debt at March 31 with no maturities prior to 2024.
We were originally targeting capital spending of 85,000,000 to $95,000,000 this year, but we have reduced the plan to between 50,000,000 and $70,000,000 in light of the expected lower cash flow from the businesses. The reduced spending level includes funds to complete the log utilization center improvement project our plywood and veneer facility in Florien, Louisiana as well as BMD's store shop expansion in Dallas, Texas. We expect our effective book tax rate to be between approximately 2530% going forward, with potential adjustments under the CARES Act. I will turn it back over to Nate to discuss our COVID-nineteen business update as well as the outlook.
Speaker 2
Thanks, Wayne. I'm on Slide number 12. Our first priority during the crisis continues to be the health and safety of our associates and those with whom we do business. It is important that we continue to support community efforts and conduct our business appropriately based upon the guidance from the CDC among others. In anticipation of weaker business conditions over the next several quarters, we reduced our capital spending plans, adjusted manufacturing production levels and implemented a number of actions to preserve cash and reduce expenses.
We have further actions identified, which we will implement as we move deeper into the quarter if it becomes apparent that demand environment and economic outlook is unlikely to reverse in a reasonable time frame. We have the experience of the last financial crisis to lean on in planning our COVID-nineteen response. However, we believe that early actions at the federal level to respond with the fiscal and monetary stimulus is likely to mitigate the depths of the economic damage and shorten the path to recovery. We are already seeing actions to thoughtfully reopen portions of the economies in the states where the curve of infections has flattened, which provides us hope that we will see a return to normal activity in a much shorter period than following the two thousand and nine financial crisis. I'm on Slide number 13.
The blue chip consensus for U. S. Housing starts was last published at an expectation of 1,160,000 for 2020. We would expect the consensus to fall between 1,000,001,100,000 housing starts over the next several weeks, but the second half of the year is very hard to predict. The new start rate and the progress completion rate for single family new construction has slowed considerably as we have moved through April.
Many builders have scaled back their construction of spec homes, order cancellation rates have increased for many builders and safe distancing practices have extended construction time frames. All of those factors lessen near term consumption of the products we produce and distribute. The COVID-nineteen pandemic and the ripple effects negatively impacted DMD sales pace in April by approximately 13% per day as compared to March. Our sales volumes declined as residential construction activity slowed in markets constrained by shelter in place orders and in other markets as a result of builder construction pace adjustments, including heightened construction site safety measures. We also experienced revenue deflation from lower prices for commodity wood products during the month of April relative to first quarter of twenty twenty.
We expect COVID-nineteen pandemic impact to result in sequentially lower sales and earnings in the second quarter in both manufacturing and distribution as states slowly reopen their economies. Because we continue to be categorized as an essential business in the vast majority of jurisdictions, we are in an excellent position to respond quickly to support customers our customers should demand rebound more quickly than expected. BMD is maintaining high service levels with the on ground in market inventories and is helping our customers make effective use of their working capital dollars. With uncertainties in demand and difficulties in judging the appropriate operating rates, commodity wood products pricing could be volatile in the months ahead. We will react appropriately.
We will continue to be guided by our values of safety, integrity, respect and pursuit of excellence. We will successfully get to the other side of this crisis by centering on the health and safety of our associates and making sure we use our operating and financial strength for the benefit of our customers, suppliers, communities and shareholders. Thank you for joining us today and for your continued support and interest in Boise Cascade. We would welcome any questions at this time. Valerie, would you please open the phone lines?
Speaker 0
Thank you. Our first question comes from Brian Maguire of Goldman Sachs. Your line is open.
Speaker 3
Hey, good morning guys. Good to hear your voice. Hope you're all doing well.
Speaker 1
Thanks Brian. Good morning Brian.
Speaker 3
Appreciate the kind of comments on the 2Q outlook there. And I guess, it sounds like things obviously decelerated a lot there towards the end of 1Q and into April. The down 13% in BMD, I just wanted to clarify, wouldn't say it was quarter over quarter or year over year, how you were talking about that. And then have you seen any week over week improvement as we've gotten into early May here? Any signs of green shoots or activity resuming?
Or are we sort of still trying to find a bottom on some of these numbers?
Speaker 1
Brian, this is Wayne. The 13% is the comparison of the daily sales rate in March with the daily sales rate in April. So part of that 13% is going to be price deflation, and some of it will be volume declines. I would tell you, in our case, the pace slowed at the March and into the April. And as we've seen some reopening, particularly in the states that shut down construction as nonessential, Those that have changed that designation, we're seeing a pickup in sales activity.
And I think the general feel is that people are pretty positive with the states taking the reopening. And I think part of what we're seeing in May and the volumes in May have been pretty good, the first week. I think part of what we're seeing is more comfort at the dealer level and trying to rebuild inventories. Because I would tell you, from the anecdotal stuff I see, I think there is a fear of missing out. If the pace accelerates, people don't want to be caught short.
And I think they're less concerned at these price levels with getting caught with inventory that would get marked down in the future. So I think part of what you're seeing is an improvement in field activity and part of what you're seeing is a little more comfort on restocking the supply chain.
Speaker 3
That's good to hear. And you hinted at some other cash actions you might be able to take if things do worsen and hope you don't have to do that. But is there anything any more specifics you can provide on what sort of other options you've got?
Speaker 1
Yes. I mean it's the same laundry list that we put together in 02/2009. And again, I would hope that we don't have to take these. But the ones that have been implemented already are what I would describe as somewhat easy to do, the reduced capital spending, try not to fill open positions, salary freeze, etcetera. The other suspects that would be on the list if this got a lot worse and if we found ourselves in something that looked like February, obviously we can reduce compensation at the senior management level.
That already happens automatically because there's a considerable amount of our pay that's variable. But we could look at base pay reductions, reductions in director fees, salary cuts more broadly. We would probably eliminate more positions. One of the things I think you'll see us do in the short term is try to protect salaried positions, particularly in talent areas or geographic locations where it's really hard to refill positions. We're likely to try to protect those salaried positions over the next several months while we see how this plays out.
But obviously, that would be on the table. Speaking personally, I would probably try to maintain the base dividend, but I would be very surprised to see us pay any supplemental dividends or do share repurchases in that kind of a downside environment. And I don't know that we would necessarily be active on the debt retirement side, but we would certainly try to maintain as much liquidity on the balance sheet as possible. Brian, it's Nate. Sorry,
Speaker 2
Brian, just maybe to add to that. As Wayne described, we have a number of different scenarios that we're looking at in terms of what it could potentially be in terms of business condition and the business environment as we move forward. So I think we've got kind of the right optics and the right metrics in front of us in terms of what would that need to look like. And as Wayne described, use some of the same cost reduction actions that we've done prior should we get to that spot. But I think as we kind of finished off April and heading into May, it's encouraging to see business levels slowly certainly stabilize and slowly respond.
And so we're we feel good about our cost position as we sit today, but we're prepared to do something different if required.
Speaker 3
Okay. Last one for me for Wayne. Just a question on receivables and if your customers are asking for extended payment terms and just sort of just the overall level of potential for bad debt expense to start creeping up if we start to see either collections take a backseat to other issues that some customers might be having in this environment?
Speaker 1
Yes. As a general rule, we're very, very conservative on credit. And through the last downturn, we had minimal write offs. And I would expect the same to be true now because we've got the same credit team in place. We have had a number of customers that have reached out and asked about extensions.
And I think Nick and his team, general response has been, we will keep our promise to you in terms of having the inventory to back you up, full trucks and ready to service you. And our expectation is that you will continue your promise to us, which is to pay us on time and within terms. And so far, I think that has been received reasonably well. I would tell you, we started to see modest shifts in April, and I would expect this to accelerate if we continue to see a slowdown. We did see more activity out of warehouse and less customer direct shipments from manufacturers.
And I think particularly on the commodity products, a lot of the mills have ten day terms. And in a lot of cases, we allow for thirty day terms. So I would expect us if the activity level slows down through the channel, I would expect more of the dealers to start relying on two step instead of taking shipments direct. And we've got a number of our wholesale competitors that are very stressed from a balance sheet standpoint. And on some of their public comments, they're clearly ratcheting back personnel and inventories.
And we saw in February that by staying in stock and, in essence, having on the ground inventories and being able to short time frame respond that we picked up business activity. And I think that will probably cushion those two factors will probably help cushion some of the falloff. But as I mentioned, we're going to do that and support the customers that we're highly confident are going to be around and can help make sure that we don't end up with significant bad debt losses. We are not going to chase business where people are being denied credit at other wholesalers or where we don't think they're likely to make it through this if it turns out to get ugly.
Speaker 3
Yes, that sounds great. All right, take care, Hope you're doing well.
Speaker 2
Thank you. Our
Speaker 0
next question comes from Mark Wilde of Bank of Montreal. Your line is open.
Speaker 4
Thanks. I'd like to just loop back and get a little more color if it's possible on just where you see kind of inventory in the channel? It sounded like you were suggesting that there had maybe been some inventory rebuilding in the channel in the last week or two?
Speaker 1
Yes. Nick, do you want to touch on what you guys are seeing real time?
Speaker 5
Yes. Thanks, Duane. Good morning, Mark. As we've talked about, there's no metrics. But I would tell you that there's I have some pretty strong impressions this time just given conversations with customers and suppliers.
And quite frankly, our own order intake, as Wayne articulates, we've seen a pretty big shift from people willing to take pretty significant positions in particularly commodity inventories, but really inventories of products across the system. And I think that's a function in what our customers are saying. It's a function that, a, they don't, have a big appetite for market risk, And b, they're just very focused on their own working capital situation. So I would tell you probably more so than any time that over the last many years, inventory levels across the system, I think, are relatively low. And, again, I think you've you've seen a bit of price appreciation on the commodity side, in the last three weeks.
In a couple cases, kinda dramatic price increases over the last few weeks. And I think that's a function of of demand starting to to creep up a little bit as as this thing opens up and a a relatively lower level of supply and a reflection that that inventories are low. And I think customers and everybody in the channel will continue to play it that way, which really plays into our hands in terms of the outer warehouse business. So that's the best I got there, Mark.
Speaker 4
Yes, that's actually really helpful because I was noticing when random lengths came out last night. I mean, of these increases that we've seen over the last three, four, five weeks are really quite dramatic in percentage terms, Nick.
Speaker 5
Yes, absolutely. And when we get that kind of price escalation, obviously, it provides a little tailwind for us on both the margin side and the sales side. So we're happy to see a little of that here and there.
Speaker 4
Could you maybe give us a little bit of color on just how you manage so that when we get a big drop the way we saw in March that you guys don't end up taking a big inventory hit on that?
Speaker 5
It's I'll I'll give you the the secret sauce here.
Speaker 2
Reach you, board.
Speaker 5
There there's there's not a lot
Speaker 6
of there's not
Speaker 5
a lot of voodooism for lack of a better way to say it. What we try to do, Mark, and this is a a plan that we've had for years and years and years, is we try to buy based on what we're going to sell in the short term. And when we get a little market movement, we fudge that a little bit knowing that we're gonna sell more when prices are escalating than when they're deescalating. And we've never had the strategy nor will we to go out and take big risks on the commodity inventory. Our commitment to our suppliers and our customers is to buy every day, be in the market every day, and keep the flow steady.
Now, certainly, when you get some pretty dramatic, swings on those prices, as we saw kinda in the month of March for part of the time in the month of March and April. And, certainly, in 02/2018, we did, in fact, some have have reserves and some more cost to market adjustments. But it's just a function of the strategy that says, like, that that we should be consistent all the time buying and selling. That's where we create value for both the supplier side and the customer side. And the guys and gals that do that every day are are making good decisions because they're really talking to the customers in the local markets.
Those are decisions that are made at the location level in terms of the quantities. Obviously, we to leverage, our size and scale and scope when and where we can, but it's a focus on the customer and and knowing what the customer's gonna have for us in terms of order flow.
Speaker 4
Okay. Last one for me. I just wondered, Nate, if you could talk a little bit from a kind of a capital allocation standpoint. I see that you're moving ahead with that Dallas door shop. And I know that kind of broadening the range of product out of some of your DCs has been kind of a priority for you guys.
But I'd also like you to talk about that and what the opportunities might be in kind of from an M and A standpoint over the next twelve to eighteen months, whether you can kind of take advantage of the people in the market.
Speaker 2
Yes. Mark, I think as we look at our strategy overall and specifically in regards to BMD, we've been pretty consistent about our desire to continue to grow that footprint both from a product perspective, from a geography perspective as well as the category, millwork and doors, as you mentioned. So I think as we kind of pressed up against kind of the COVID-nineteen, we're, I think, even more encouraged around our strategy and our ability to continue to grow the marketplace. As Nick described, I think we have very strong support from our customers and suppliers in terms of growing our position, and that will continue to be a really important part of our path forward here short term and long term. So in terms of the confidence and optimism we have around our distribution business, I think, again, as Nick and I think Wayne described as well, our customers are going be very dependent upon us in terms of warehouse support, and we're prepared for that, and we're looking forward to that as well.
As we move forward, we want to continue to grow that business. And as you described, over the next twelve to eighteen months, we suspect there's going to be some perhaps meaningful opportunities, different opportunities that will emerge as maybe compared to even three to six months ago. And I think we're well prepared as an organization financially.
Speaker 1
I think we want
Speaker 2
to be measured, Mark, just given all the uncertainties that are in front of us, including when you look at the unemployment number from this morning, stunning in terms of nearly 15% unemployment. So we'll be measured as we move forward. But I think in terms of our conviction and belief around growing our distribution platform and continue to invest in that platform for a range of products and services, including expansions where appropriate, we're that's certainly part of our path forward.
Speaker 1
Okay. Sounds good. I'll turn it over. Thanks, Mark.
Speaker 0
Thank you. Our next question comes from Reuben Garner of The Benchmark Company. Your line is open.
Speaker 1
Hey Reuben, good morning.
Speaker 7
Good morning guys. Thanks for taking my questions. So maybe, let's see. Maybe starting on the, the general line, business, very strong growth again in the quarter. I think you've had, you know, a string here of three or four quarters in a row with pretty impressive growth.
Speaker 1
I assume a little bit
Speaker 7
of that is still M and A, but the vast majority of it is volume growth and probably share gains. Can you just give us an update there? And can that continue to going forward and help you maybe offset some of the market declines just because it's a self kind of initiative?
Speaker 1
Ruben, this is Wayne. I'll let Nick follow on if I mess this up. I think part of what you're seeing on the general line is we've got a couple of key products that are very important in that section, composite decking and siding being two that I would probably point to. And we continue to have very good results there. As you may recall, in the middle part of last year, we picked up a relationship with a key supplier in the Siding arena, and we've had very good growth in a number of our branches in that product category.
So part of what you're seeing is a comparison in 1Q 'twenty that has those sales in that category growth compared to those sales not necessarily being in the base year. So I think some of the quarter over quarter growth numbers will slow down as we get into the back half of 2020. But certainly, that supplier relationship and that win in the Siding category and again, very good performance continuing on the composite decking arena, those are two that I'd point to. And Nick, I don't know if you would add beyond that or correct what I said, but I would say that's two of the areas that I pay attention to.
Speaker 5
No. This is Nick again. I think you hit it on. And I think, Ruben, you touched on the third leg of that. If you think about the acquisitions we've made in the first quarter of 'nineteen, we didn't have our Bermingham operation in those numbers.
And obviously, we do this year. So I think the sum of all those three things is how you should think about it.
Speaker 7
Thanks. That's that's, very helpful. And and it kinda ties into my my next question a little bit as we've seen, you know, some some r and r strength, particularly in the d I DIY channel. I guess, are you guys seeing benefits of that in plywood business, at all in the early part of Q2? And, I know you took, quite a bit of volume or capacity out in that space.
How quickly can you bring it back on if maybe demand is not as bad as you initially anticipated?
Speaker 1
Mike, you wanna take that one?
Speaker 8
Yeah. Sure. Good morning, Ruben. Yeah. This is Mike.
Yeah. You're right. If you look at the big boxes, the quite stunning, really, the consistency and recently improvement in demand for panel products. So, I can't explain exactly why all that's happening other than perhaps people that are sheltering at home have many DUI type projects that they're undertaking. But it's been very helpful for us in terms of, maintaining the sales levels for our plywood products.
And I hope it continues. It may even, increase as we get into the into the summer. The question around can we produce more if necessary? So we stated earlier, some weeks ago, that we were just producing our volumes, of course, which we have done, basically in line with what we put out. But we have the ability in, a relatively short period of time to ramp up volume if required.
And that would be either through the folks that are still working with us today, there's overtime opportunity, or in certain locations, we have a callback list where we can go to those folks that were unfortunately laid off and call them back to work. And and usually that can be done within, let's say, a week or so if necessary. So I I don't see a huge problem if required in terms of ramping up the volumes to meet the demand at this stage.
Speaker 7
Okay. Very helpful. Good luck navigating through this, and stay safe, everybody. Thank you.
Speaker 1
Thanks, Thank you.
Speaker 0
Our next question comes from George Stairs of Bank of America. Your line is open.
Speaker 1
Hi everyone. Good morning.
Speaker 9
Thanks for the details. Hope you're all doing well. Thanks for all you're doing on COVID as well. Hey the first question that I had I wanted to go back to the extent that you can comment on a question that I think Brian had teed up. So is there a way to quantify what that potential shock absorber hopefully you never need to get to it in this cycle, but what it might be able to look like, what it might be able to buffer your results or cash flow by if, in fact, we had to go to that next step?
And it sounded like, given trends coming out of April into May, that looks to be less likely, but I just wanted to confirm that.
Speaker 1
Yes. I mean we will see where we are on the run rates, particularly in distribution, as we go through May. I think as a general rule, Mike can jump in here, we're running our wood products facilities basically five days a week, twenty four hours a day, so as opposed to twenty fourseven. So we'll obviously pay attention to operating rates and prices on what's going on in wood products. But the key, I think, over the next several months is going to be what activity levels do we see through distribution.
I would describe it to you this way in terms of the cost reductions. We are not concerned at all about balance sheet and liquidity and cash. So in terms of getting through this downturn, we don't foresee any issues from an affordability standpoint. What we're very focused on is kind of also pay attention to earnings level. And we will make cuts when appropriate if we think we are taking too much of an earnings decline because obviously, we're paying attention to our ratios of debt to EBITDA.
We want to make sure we continue to cash fund our CapEx, interest and dividends. And again, we have a list. And I'll give you an example. And again, I'm not saying we will do this immediately. But if we were to suspend four zero one match, for example, that annualizes out to about $12,000,000 Now would I prefer that we don't need to go to our employees and ask them to, in essence, give up $12,000,000 worth of retirement benefits.
I would prefer not to do that. If this looked like 2009 in 02/2009, we eliminated our pension and we suspended four zero one contributions. And again, that type of playbook could be relevant if we got into a draconian situation. Same would be Nate and I taking cuts in our base pay along with what we're seeing for reductions in variable comp. And that's a couple of million dollars in corporate expense.
If you do that across the corporate team, we could take several million dollars out of our corporate overhead. Would I prefer not to do that? Yes. And I don't think we're going to need to do that to preserve liquidity or cash from an affordability standpoint. But we are very conscious that we don't want our debt to EBITDA ratios to go out of line, and we do not want to be borrowing to pay interest or pay dividends.
So we would like to maintain as much earnings strength as appropriate. And again, if need be, we will be at the lower end of that capital spending range. And if we see things improving, we will probably be closer to the 70,000,000 number because as Nate mentioned, there's a couple of things that are on the docket that we would like to do to continue to expand the distribution footprint. So if you said scale the expense reductions, it could be anywhere from $0 to $20,000,000 to $25,000,000 on an annualized basis, depending on how bad the situation becomes. And we've got a list that would build to a meaningful number if we got into that scenario.
Speaker 9
Wayne, that's great. Again, I didn't I purposely said it in an aggregate way. I didn't mean initially for it to get granular. I appreciate that candor, and you guys have done a great job of positioning the balance sheet for things like we're experiencing right now. So I mean it's unfortunate, but it's great that you've done that.
Speaker 1
Yes. And again, no one should take it. We're just trying to be very, very thoughtful of preserving the franchise, for preserving employee morale. And frankly, for our suppliers and customers, sending a very strong message
Speaker 2
that if you're concerned about having a distribution partner that can get your products to market and pay you if your product aligns with what we're trying to do, we are open for business and prepared to support our suppliers and help them continue to grow and take share. Maybe George, it's Nate. Maybe just to add on that. I think it's we see this as a momentum opportunity. Obviously, a very difficult climate, but we think we are well positioned as a company to meet this challenge and including, I think, the experience and depth of our team in combination with our balance sheet.
So as we think about the challenges, it's an opportunity to gain share, gain momentum and really accelerate coming out of this whenever that takes place. So that's part of our thinking in terms of making sure we've got kind of the correct spending levels that are in place today. And if things turn south, then we're prepared to move forward. But we think things have stabilized and slightly improved. And we want to make sure we're in a position to provide great service to support, as Wayne described, both our customers and suppliers.
That's certainly part of our thinking as well.
Speaker 9
No. Understood, Nate. Understood. Again, thank you for the directional guidance on 2Q. That's helpful given for any of the wood product business how much earnings can swing with pricing and demand.
What have you baked in to your outlook, if not just 2Q but into the year from potential increases in imports from South America? I know in the last few quarters when it's been brought up, hasn't been a factor. But CNPC on its call today was talking about exporting a bit more. COPAK Arauco has been talking about that although they haven't reported their numbers yet. Are you seeing any change in the dynamic there?
Is it pretty humdrum at the present time? And relatedly on the supply side, It seems like some of your peers in EWP are having a little bit of difficulty running. Are you seeing that as an opportunity to either gain share and or at some point take pricing up in EWP even though prices were flat to down this quarter?
Speaker 1
Mike, do you want to touch on that?
Speaker 8
Yes, sure. Yes, good morning, George. Hey, mate. So yeah, mate. The South American issue, I guess I would say it's pretty much business as usual.
We haven't seen either a great great fall off or a great increase. I mean, I know you're tracking things like what's happening to the Brazilian real, which is at full time record highs. And with the fact that our plywood pricing in The States has appreciated a little bit over the recent past, If they could produce more, I think they would try and ship more. But as you are well aware, they're having some very significant social issues with related to COVID nineteen in Brazil at the moment. So if they can get it produced and get it on a boat, I think they will try and send some more, but I don't think that's going to be from today to tomorrow.
It might happen over the next quarter or two. You asked a question about EWP pricing.
Speaker 9
I think that would be a very competitive Yes,
Speaker 8
both. Yes. I'll do the pricing one first. EWP price Look, it's
Speaker 9
a tough market to raise pricing.
Speaker 1
I get it. I just want to say
Speaker 8
Yes. Yes. I think it would be a challenge at this point in time given the situation as it relates to homebuilders and some of the additional costs that they're incurring as well as our dealer partners to go out and force a price increase at the moment, which is sort of related to your other comment and question around EWP supply from our competitors. I can't speak to all the challenges that they're facing. But as it relates to our situation, we have ample amount of veneer, so we're not really impacted by having to buy veneer on the outside market because we're not quite but mostly 100% self sufficient.
We have ample production capacity and we have ample finished goods inventory to service our current customers. And there may be some opportunity if one of our competitors sort of falls on their sword. But I haven't heard a lot of that of recent time, to be
Speaker 1
honest. Okay. But I think it's fair to say that the new capacity that was coming has not had a meaningful impact in the marketplace that we have seen today. And it's fortunate that, that facility has been slow ramping up because given the declines in demand, this would have been a bad time to have a lot of incremental supply show up in the market. And at least at this point, we haven't seen much, if any, impact in the market from that capacity.
Speaker 2
George, the other thing I
Speaker 1
My last go
Speaker 2
ahead, sorry. Yes. Sorry, George, it's Nate. I just maybe add one other thing just in terms of when you're in these kind of moments where for a producer, whether TWP or other products, great distribution really matters at this point in time, given the probably the more dependent side of out of the warehouse. And so as I think about our EWP franchise and the integrated model that we have, obviously, BMD and Wood Products, along with some of the independent distributors we have, I think we're in a really strong position to service and execute in the marketplace, maybe better and different than maybe some of the other UWP manufacturers who are out there.
So to your point on share and our ability to service and support the market, we feel really good about our distribution capabilities, certainly, starting with BMP.
Speaker 8
Okay.
Speaker 3
You know what, I'll turn it over.
Speaker 9
I had one more question, but just to be fair, I'll turn it over.
Speaker 1
Thanks. George.
Speaker 0
Our next question comes from Steve Chercover of D. A. Davidson. Your line is open.
Speaker 1
morning So
Speaker 6
a couple of my questions have been asked but let me try to get a couple in here. So amazingly both the lumber composite and the panel composite appear poised to exceed the Q2 'nineteen average prices and according to the charts and most recent random lengths. So presumably the real hit for you guys is on volumes and cost absorption. So can you just help us understand how the diminished volumes might impact your decremental margins?
Speaker 1
Sure. I'll take a shot. And again, Mike or Nick can chime in. I think part of the challenge in 2Q is going to be potentially price in combination with volume. But to your point, if we end up flat on 2019 prices, I think the biggest decremental hit in wood will be running five days a week instead of seven.
And as I said, we have been reluctant to take a lot of salary cost out with the view that with the states reopening, we really want to see if we're going go back to the full operating schedule later in the year. But that remains to be seen. So I think as typically, I would have said that the decremental margins in wood would on an EBITDA basis would be in the 20% to 25% range. I suspect in the short term here, it will be more than that. And we would have get back to a number that's closer to that if we start instead of running facilities five out of seven days, if we came to a conclusion that this was going to go on for an extended period of time, we might identify one or more higher cost facilities and take them dark and pull out more fixed costs.
I think on the distribution side, it's a somewhat similar story. On the way up, we typically talk about a 4%, 4.5% incremental EBITDA margin on revenues. I suspect that decremental margins will be slightly worse than that as we lose volume. If you look at some of the things that Nick and his team have put in place as we've been growing the business pre COVID And I think about what our cost structure looked like, pick a number the last time, were at $3,000,000,000 in revenues. We had fewer geographic locations, fewer branch managers, etcetera.
So if we were to see a 25% or 30% drop off in revenues in BMD, we would need to make structural changes in the fixed cost to get back to where we were from a fixed cost basis to $3,000,000,000 of revenues on the way up. So in terms of guiding on the way down, at least in the near term, I would think of a number north of 4.5% in terms of the decremental margins in BMD. I think it will somewhat be hard to look at an incremental drop, for example, of $100,000,000 in revenues because likely the commodity pricing variation and the margin impact on the remaining sales, if you said you went from 1.1 down to $1,000,000,000 in revenues, I'm not sure looking at the decremental margins on the $100,000,000 is going to be that indicative versus do we lose 40 basis points on margins on the whole book. But I fully expect margin compression in the second quarter in VMD if we lose volumes in April and May and into June. And again, in wood, I think you'll see a pretty steep drop off in EBITDA.
If we're running down 25% or 30% on volumes, that will have a meaningful impact on the EBITDA generation and would in the near term.
Speaker 6
Thank you. And this might sound like a goofy follow on, but what are the logistics of going from seven days to five days? I mean because you have shifts that go seven days on and two days off.
Speaker 1
Or how does that work? Mike? Okay. Do you wanna yes.
Speaker 8
Go ahead. Yeah. I'm back on. I got cut off, but I'm back. Okay.
Yeah. So the the the simple way of explaining it is, generally, I'll use a plywood mill as an example, Steve. So we run a four ship off four shift operation, which means that there are eight hours in a shift. And each shift, there are three shifts in a day, and we have one additional shift that sort of substitutes on a rolling basis. So when we go from seven days a week to five days a week, we simply reorganize those deck chairs.
And and and, clearly, you end up needing less people. But you you can you effectively reduce the the number of people you have, but you still end up with a a a rolling configuration in in most cases, not all. So it's just and and in and in some locations where we have a union representing, our employees, there's a sort of a hierarchy or a bumping list as as it's called, and essentially it works on tenure. So those that were that came on last are the first to go off unless somebody that's more senior or tenured wishes to opt out. So it does take a little bit of time, but, as we indicated, you know, weeks and weeks ago now, we've effectively maneuvered all our facilities from that seven day operation to five, and not all our mills run twenty four seven because we you in this market situation, not the EWP side, we have capacity that we haven't been using recently because we obviously haven't got anywhere near the 1.4, 1,500,000 housing staff.
Is is that enough to be thoughtful?
Speaker 1
Yeah. Thanks.
Speaker 6
Yeah. No. That that that's helpful. And then finally, when it comes to your operating posture, are we at a point now where cash generation or contribution takes precedence over generating an appropriate return on capital?
Speaker 1
Well, again, this gets back to the preserving the balance sheet versus preserving the P and L and preserving the Ford franchise. So at this point, we remain very return on capital focused. But I would tell you we maintain return on capital focus over three to five years, not ninety days. So part of what you're going to see in terms of maintaining the franchise and investing for growth, including, by the way, payroll costs, inventory, holding positions, etcetera, we think over three to five years, our shareholders will get paid if we can continue to grow this franchise and take share. And that may mean suboptimizing the P and L if you're measuring on a ninety- or one hundred and twenty day period.
And so if you said, Am I return on capital focus? Absolutely. Are we focused from a capital allocation on trying to generate compounded returns for shareholders? You bet. But we're doing that with a view over three to five years, not let's make sure we report a 2,000,000 or $3,000,000 better number in the second quarter than we otherwise would.
We're very much trying to figure out that balance point that says, how do we take advantage of our financial position, servicing the market, etcetera? And while it may involve some incremental near term costs, we think, as strange as it sounds, we have an opportunity to step on the accelerator and create rewards for our shareholders that will show up three years from now, five years from now. And we could be more draconian and show better results for 2020. But we don't think we would get as much leverage and gain into 'twenty one, 'twenty two and 'twenty three as if we stay focused, everybody head down, work and really, really focus on customers and suppliers and, frankly, taking care of our people. We think the commitment to our people and commitment to customers and suppliers will pay our shareholders from a return standpoint, no pun intended, great dividends in the next three to five years if we do this right over the next six to nine months.
Speaker 6
Got it. So not like I'm
Speaker 5
a golfer, but there's a
Speaker 6
short game and a long game.
Speaker 1
Well, thanks, guys. Stay safe. Thank you. Thank you.
Speaker 0
Thank you. Our next question comes from John Babcock of Bank of America. Your line is open.
Speaker 3
Hi, guys. I just want to relay a question actually from George here. So overall, our experience in the past with door business has been that it is challenging for door producers. Some of this is driven by overcapacity. And so why is this a good business for Boise to build out in BMD?
And then generally, I mean, that the supply side gives you attractive procurement of doors? Or is it something else?
Speaker 1
So on the BMD franchise, like the door shop in Texas, we have a very good relationship with Therma Tru and a number of other branches. And so this is really extending the franchise we have with Therma Tru in the Atlanta geography. We're taking that same business model and taking it to Texas. And again, it's a very good relationship with Therma Tru. We have the capital available.
We think the Texas marketplace is likely to be a great opportunity for us over the next three to five years. And by the way, we think relative competitive dynamics, we will have a very good offering in market this year. And we'll be able to capture share this year and into 'twenty one that if we delay, that market share capture may be more difficult to achieve if we were to delay this until 2022. We think this actually creates an environment for us. And that's true in a handful of geographies where we think we've got fill in opportunities.
We think we have an opportunity to take advantage of this fact that we can afford to keep inventories on the ground and keep people in place and high service levels, we think we can continue to fill out BMD's map. And again, there is going to be a shared trade off. If you said, does the market really need the incremental capacity? Maybe not. But we think we're playing from a position to strengthen.
And again, we don't think we're going to have a negative impact on margins necessarily from doing that because we think our balance sheet is going to give us a real advantage with suppliers and customers.
Speaker 5
John, this is Nick. One point of clarification here, and maybe I'm hearing you a bit. We are not going to manufacture door components. We're not gonna manufacture slabs or frames or anything like that. What we do in our existing facilities and what we intend to do in Dallas is take those components and assemble, light manufacture, but more assemble finished door units.
And to Wayne's point, it's an augmentation of our product mix that our current customers are buying. In the Dallas situation, we anticipate taking share, and it really adds to the product mix and the service capabilities in terms of the things that we can do from a scale standpoint to service our customers. But just just for clarity, we're not manufacturing door components. We are assembling components into pre prehung units that we take to the lumber yards.
Speaker 8
Okay. Thanks for the detail.
Speaker 1
Thanks, Eric.
Speaker 0
Thank you. I'm showing no I'd further questions at this like to turn the call back over to Nate Jorgensen for any closing remarks.
Speaker 2
Great. Thank you, Valerie. Before we wrap up, I want to express my appreciation to our associates for their continuing efforts to work safely, to take care of each other and their communities and to service our customers. The rapid negative impacts of the pandemic situation have required responsive, thoughtful actions and a focus on personal and community safety like we've never seen before. Our associates have absolutely risen to the occasion.
I'm tremendously appreciative and proud of all that they are doing. I'd also like to recognize the incredible efforts of the medical professionals, first responders and others working tirelessly to get safely to the other side of this outbreak. There are untold number of people showing up every day and putting others first, including those helping on food security and housing issues driven by the crisis. This is a time that calls for unity and compassion. There are signs that the economies in many states are slowly beginning to recover as COVID-nineteen shelter in place orders are relaxed.
It is going to take time and will need to be done thoughtfully. In the weeks and months ahead, stay safe, be well and help others when you have the chance. We will get through this together. Have a good weekend, everyone, and thank you.
Speaker 0
Thank you. Ladies and gentlemen, this does conclude today's conference. You may all disconnect. Have a great day.