Boise Cascade Company - Earnings Call - Q3 2021
November 2, 2021
Transcript
Speaker 0
My name is Chris, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Boise Cascade's Third Quarter twenty twenty one 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. Call.
Before we begin, I remind you that this call may contain forward looking statements about the company's future business prospects and anticipated financial performance. These statements are not guarantees of future performance, and the company undertakes no duty to update them. Although these statements reflect management's expectations today, they are subject to a number of business risks and uncertainties. Actual results may differ materially from those expressed or implied in this call. For a discussion of the factors that may cause actual results to differ from the results anticipated, please refer to Boise Cascade's recent filings with the SEC.
It is now my pleasure to introduce you to Kelly Hibbs, Senior Vice President, CFO and Treasurer of Boise Cascade. Mr. Hibbs, you may begin your conference.
Speaker 1
Thank you, Chris, and good morning, everyone. I would like to welcome you to Boise Cascade's third quarter twenty twenty one 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 Jeff Straum, 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, Kelly. Good morning, everyone. Thank you for joining us on our earnings call today. I'm on Slide three. Our third quarter sales of $1,900,000,000 were up 18% from third quarter twenty twenty.
Our net income was $91,700,000 or $2.31 per share compared to net income of $103,200,000 or $2.61 per share in the year ago quarter. Third quarter twenty twenty results included a $10,500,000 after tax loss on extinguishment of debt or $0.27 per share as we refinanced our senior notes. In third quarter twenty twenty one, total U. S. Housing starts increased 8% compared to the same period last year.
Single family housing starts, the primary driver of our sales volumes, increased 5%. Our associates' performance was simply outstanding during the quarter in face of historic declines in commodity prices and ongoing challenges related to COVID-nineteen. Our Wood Products manufacturing business reported segment income of $122,100,000 in the third quarter compared to $66,000,000 in the year ago quarter. Wood Products benefited from higher plywood pricing levels and improved EWP sales realizations and volumes compared to last year's third quarter. Sequentially, sharp plywood price decreases were offset partially by continued EWP price increases resulting from prior period pricing actions.
Our Building Materials Distribution business reported segment income of $16,600,000 on sales of $1,700,000,000 for the third quarter compared to $107,900,000 of segment income on sales of $1,400,000,000 in the comparative prior year quarter. B and B's results were negatively impacted by historic declines in commodity wood products pricing. Higher sales volumes and gross margin on our engineered wood and general line products helped to mitigate the negative impacts from the commodity price declines. Kelly will walk through the financial results in more detail, and then I'll come back and provide our outlook before we take your questions. Kelly?
Speaker 1
Thank you, Nate. Wood Products sales in the third quarter, including sales to our Distribution segment, $497,300,000 compared to $363,700,000 in third quarter twenty twenty. As Nate mentioned, Wood Products reported segment income of $122,100,000 in the third quarter compared to $66,000,000 in the prior year quarter. Reported EBITDA for the business was $136,000,000 up from EBITDA of $80,000,000 reported in the year ago quarter. The increase in segment income was due primarily to higher EWP plywood and lumber sales prices as well as higher EWP sales volumes.
These improvements were offset partially by higher wood fiber costs and lower margins on inventory purchase for resale through certain customer programs. BMD sales in the quarter were $1,700,000,000 up 20% from third quarter twenty twenty. Sales prices increased 23%, offset by a sales volume decrease of 3%. The business reported segment income of $16,600,000 or EBITDA of $22,600,000 in the third quarter. This compares to segment income of $107,900,000 and EBITDA of $113,600,000 in the prior year quarter.
The decline in segment income was driven primarily by a gross margin decrease of $100,500,000 resulting from a sharp decline in commodity prices during third quarter twenty twenty one. The negative impacts from commodity price declines were offset partially by higher sales volumes and gross margin percentages for EWP and general line products as well as decreased selling and distribution expenses of $7,800,000 The amounts for unallocated corporate costs and other items impacting our reported adjusted EBITDA can be found in the tables of our earnings release. The net of those items was negative $9,200,000 in third quarter twenty twenty one compared with negative $15,400,000 in third quarter twenty twenty. The decrease was due primarily to lower employee related expenses of $3,000,000 most of which relates to incentive compensation. In addition, third quarter twenty twenty results included approximately $3,200,000 of estimated business interruption losses absorbed at the corporate level related to disruptions at Wood Products facilities as part of our self insured risk retention program.
Turning to Slide five. Our third quarter sales volumes for I joist and LVL were up 212%, respectively, compared with third quarter twenty twenty. Demand for EWP continued to be strong through the quarter, fueled by increased housing starts. Pricing in third quarter for I joists and LVL were up 1614%, respectively, compared with second quarter twenty twenty one as previously announced price increases continue to take effect and certain temporary price protection arrangements expire. Turning to Slide six.
Our third quarter plywood sales volume in Wood Products was three fourteen million feet compared to three sixteen million feet in third quarter twenty twenty. However, plywood sales volumes were down 7% sequentially due to rolling curtailments taken to assist in balancing supply and demand and additional pandemic related disruptions during third quarter. The 5 and $61,000 average plywood net sales price in third quarter was up 31% from third quarter twenty twenty. However, not unlike other commodity wood products, plywood prices declined sharply during the third quarter, decreasing 36% sequentially. As we exited the third quarter, plywood pricing has stabilized, but price realizations thus far in fourth quarter are still approximately 30% below third quarter average levels.
Moving to Slide seven. BMD's third quarter sales were $1,700,000,000 up 20% from third quarter twenty twenty. By product area, BMD's commodity sales increased 7%, general line product sales increased 20% and EWP increased 57%. Gross margin dollars generated declined by $100,500,000 in third quarter compared to the same quarter last year. The gross margin percentage for BMD was 7.9%, down eight fifty basis points from the 16.4% reported in third quarter twenty twenty.
BMD's EBITDA margin was 1.3% for the quarter, down from the 7.9% reported in the year ago quarter. The sharp decline in commodity prices during the quarter is evident in BMD's results. However, higher sales volumes and gross margin percentages for EWP and general line products as well as decreased selling and distribution expenses of $7,800,000 helped offset the impact of falling commodity prices. Demand remains healthy, commodity prices have stabilized and B and B's commodity inventory was well positioned as we exited the third quarter. Given this backdrop, we anticipate gross margins returning to normalized levels in the fourth quarter.
I'm now on Slide eight. This slide shows the sharp decline in lumber pricing starting late second quarter and continuing through the majority of the third quarter before finding stability in September. Turning to Slide nine, although lagging the lumber price declined somewhat, the Random Lengths Composite Panel Index reflects sharp price declines in the third quarter as well. Commodity product pricing could continue to be volatile as we move through fourth quarter. Pricing movements from current levels will likely be determined by the strength of end market consumption and industry operating rates, both of which could be influenced by seasonal impacts of winter weather, supply chain uncertainties and ongoing challenges with labor.
On Slide 10, we have set out the key elements of our working capital. Net working capital, excluding cash, income tax items, accrued interest and dividends payable decreased $147,500,000 during the third quarter. Accounts receivable, inventory and accounts payable all decreased with the deceleration of sales in the quarter as commodity pricing fell. An increase in accrued rebates contributed to the increase in accrued liabilities. The statistical information filed as Exhibit 99.2 to our eight ks has the receivables, inventory and accounts payable data broken down by segment for those interested in the details.
I'm now on Slide 11. We finished third quarter with $787,000,000 of cash. Our total available liquidity at September 30 was approximately $1,100,000,000 which reflects our cash and availability under our committed bank line. We had $444,000,000 of outstanding debt at 09/30/2021. We expect capital expenditures in 2021 to total approximately 90,000,000 to $100,000,000 Our capital spending in 2021 includes completion of a log utilization center project at our flooring, plywood and veneer plant, a new door assembly operation in Houston and expansion of our distribution capabilities in the Nashville market.
Looking forward to 2022, our current expectations are for capital spending, excluding acquisitions, to range from $100,000,000 to $130,000,000 Our 2022 capital expenditure range is purposely wide at this time as availability of engineering and construction resources and timing and availability of equipment purchases is expected to have an influence on 2022 spending. In addition, capital spending could also increase or decrease as a result of a number of factors, including acquisitions, efforts to further accelerate organic growth, exercise of lease purchase options, our financial results and future economic conditions. Our effective tax rate is expected to be between 2527% with the potential that ongoing federal legislation activity increases future tax rates. Our Board recently approved a $02 per share or 20% increase in our quarterly dividend effective with our December dividend payment. In addition, in light of our higher than targeted cash balance, the Board also approved a supplemental dividend of $3 per share, our second supplemental dividend of 2021.
After payment of the supplemental dividend, we remain well positioned with sufficient cash and reserve to remain focused on the execution of our strategies, including future organic and acquisition growth opportunities. Our overarching objective remains to successfully grow our business while generating appropriate returns on shareholder capital. I will turn it back over to Nate to discuss our business outlook.
Speaker 2
Thanks, Kelly. I'm on Slide number 12. The demand environment for new residential construction continues to be favorable, supported by low mortgage rates, continuation of work from home practices by many and demographics in The U. S. We expect strength in residential construction activity to continue for the remainder of 2021 and into next year.
The October blue chip consensus for U. S. Housing starts is $1,590,000 for 2021 and $1,570,000 for 2022. In addition, the age of U. S.
Housing stock and limited home inventory availability will continue to provide a favorable backdrop for repair and remodel spending. Although we believe the current U. S. Demographics support the level of forecasted housing starts and many national homebuilders are reporting strong near term backlogs, labor shortages and supply induced constraints on residential construction activity may continue to extend build times and limit activity. In addition, the pace of residential construction and repair and remodeling activity may be affected by the economic impact of costs of building materials and construction, housing affordability, mortgage interest rates, wage growth, prospective homebuyers' access to financing and consumer confidence as well as other factors.
Demand for EWP remains strong, and pricing efforts on EWP have maintained traction and will help offset impacts from lower plywood pricing. As always, we will continue to focus on innovation as a means to mitigate rising input costs and help address labor shortages. In B and B, the demand environment remains good across our customer base and our inventory is well positioned. We are excited our Houston door assembly operation and our Nashville expansion are operational and appreciate all those in B and D and our corporate teams who have contributed to those efforts. Our balance sheet remain continues to afford us the ability to continue our pursuit of further growth opportunities within B and B.
As we wrap up our formal comments, I want to express my appreciation for our associates. The last one years point has thrust upon us many challenges never before experienced. I am incredibly proud of how our associates of our associates as they continue to navigate in a climate where patience and flexibility is a must. Our proven values of integrity, safety, respect and pursuit of excellence continue to serve us incredibly well and will continue to be our foundation moving forward. We will continue to make sure we use our operating and financial strength to benefit of our to the benefit of our customers, suppliers, communities and shareholders.
Thank you for joining us today and for your continued support and interest. We welcome any questions at this time. Chris, would you please open the phone lines?
Speaker 0
Yes, sir. Our first question comes from Mark Wilde of Bank of Montreal. Your line is open.
Speaker 3
Good morning, Nate.
Speaker 1
Good morning, Mark.
Speaker 4
Morning, Mark.
Speaker 3
To start out guys, I wondered if you could just talk with us about EWP pricing. I mean, your sort of sequential increase was quite a bit smaller than one of your big public peers that reported at the end of last week. I wondered if you could just help unpack that at least a little bit. I mean, how much is timing mix? I think, Nate, you mentioned the end of price protection that was out in the market.
So just trying to think about the difference and also to think about what kind of lies ahead over the next couple of quarters. I know that EWP prices always take three or four quarters to roll in.
Speaker 1
Yes, Mark. So yes, I can't speak to the comparison of us versus the peer you referenced, I mean, terms of what the timing, what the announcements they had and maybe what mechanisms they have down the channel in terms of rebates and whatnot. So I can't really I wouldn't venture a guess to compare on that. But in terms of specific to us, yes, we did see sequential kind of 14% to 16% across our product lines, and we feel good about that. And I would say, looking forward, I'd give you a little guidance here for the next couple of sequential quarters, Mark, that would be mid to high single digits as we move forward from here as we continue to kind of layer on and get the benefits of the announced increases we've announced and the price protection mechanisms kind of roll off.
Speaker 3
And Kelly, just to be clear, is that mid to high single digits sequentially for a couple of quarters?
Speaker 5
Yes, Mark.
Speaker 3
Okay. And is it possible we don't see a lot of announcements typically around sort of EWP capacity. Is it possible to get some sense of what's out there on the horizon? I mean, know that a big privately held company from Oregon put a new facility in South Carolina a little while ago. I think that is up and running.
But can you give us a general sense of what is out there incrementally in your business lines in EWP?
Speaker 4
Good morning, Mark. Yes, it's Mike. Good to hear from you.
Speaker 3
Hi, Mike.
Speaker 4
Yes. So yes, the facility that you just referred to, I would say that they are up and running, but certainly not running at anywhere near capacity from what I hear. I'm not aware of any additional incremental EWP capacity of any significance that is being thought about or brought online at this point in time. I would say that most that are in the EWP manufacturing sector continue to struggle with the same issues that many others are struggling with, namely not always being able to get the workforce that's necessary to run all the equipment as we or they might like. And particularly in EWTP area, I've spoken about this previously, there is a shortage of the types of veneer, the types of fiber that is necessary to go in to make those sort of products.
And there has been a little bit more of that become available since plywood prices declined, but it wasn't a huge transformational sort of shift in availability. So maybe a little bit more either EWP has been produced now than let's say six, eight months ago. But there's no big projects that I'm aware of that are on the horizon to add additional capacity.
Speaker 3
That's helpful, Mike. I hadn't seen anything, but again, it's a little harder to kind of track, think, engineered wood. The last question for me. The distribution results were quite a bit weaker than we expected. Can you just talk about the drag from falling commodity prices and sort of any losses on inventory that you might have taken during the third quarter?
Speaker 1
Sure, Mark. This is Kelly. I'll take the first crack at it and then others can jump in if they want. So you may recall from our comments when we were speaking to you about the second quarter, we had roughly a $12,000,000 LCM that we recorded against BMD's inventory at June 30. And then I would tell you, and if you look at the commodity price crash that you're well attuned to, prices fell substantially from July through August before finding some stability in September.
So I would say in terms of there was a lot of wreckage in our income statement in VMD in July and in August as we were turning our inventory. And I would say the team did a nice job of liquidating turning that high priced inventory. And so when we get to the September, we don't have an LCM. We've moved our high priced inventory. And we as I alluded to in the comments, we feel good about our position and that we can return to normalized levels of gross margins as we move through the fourth quarter.
Speaker 3
That's really helpful, Kevin.
Speaker 2
Mark, maybe just another quick comment on that is that I think as we look at the quarter, as Kelly described, I think we're we feel good about our inventory position. And I think as we think about the probably the dependence some of our customers will have on distribution, we see that continuing to grow. People, I think, are a bit more measured on their working capital. And I think that, again, speaks incredibly well and supports our distribution business. So as we move forward in the quarter, we feel good about our inventory position, but also feel good that maybe some of the dependency from the marketplace will actually increase as we close out 2021.
Speaker 3
Okay, that's helpful. I'll turn it over, Nate. Thank you.
Speaker 2
Great. Thanks, Mark.
Speaker 0
Thank you. Our next question comes from George Staphos of Bank of America. Your line is open.
Speaker 6
Thanks. Hi, everyone. Good morning. Thanks for the details. Morning, George.
How is it going? Congratulations on the quarter.
Speaker 4
I wanted to
Speaker 3
dig in a little
Speaker 6
bit to EWP and what you're seeing given the very good pricing traction that you're getting and those are getting in the market relative to any competing activity, maybe loss of share, if any at all, to traditional dimensional lumber since, obviously, lumber prices are lower. Are you seeing any effect of that in the market right now? And then kind of a related question, your customers are having to deal with labor shortages. They're obviously getting higher prices on their homes and they're happy about that. But at the same time, there's some boomerang effect that could happen from that on demand at some point.
So what are your customers doing in terms of their plans for building next year that could either benefit or retard some of the business trends that you'll be seeing in 2022?
Speaker 1
So let me I think that there's a two parter there, Mark sorry, George. Let me take the first one and then maybe I'll pass it to Nate on the second one. So the first one, in terms of kind of EWP pricing relative to 2x10s, for example, and do we see some sort of a shift, if you will, away from EWP in that sort of environment? We really don't. We the demand environment, the order file for EWP is still solid.
And as you referenced, labor is a challenge. And so the national homebuilders, for them, EWP on the job site is a much more efficient product to install. And so we just really don't see we really don't see them transitioning back. Might there be some small things on the frames that might change that might shift a little bit now and again, I suppose. But on a broad scale, we really don't see it.
Speaker 2
George, on your second question, on maybe some of the trends or kind of what customers are describing to us. I think what we're experiencing as we close out 2021 and head into next year is probably more consistency in terms of the kind of the cadence of housing starts. I think builders have done a good job of kind of matching the industry's capabilities on a range of products and services to their demands. And so I think that stability and cadence has frankly improved as we close out 2021, and I expect that to be a theme as we head into 2022. In terms of their markets and kind of what we're hearing or experiencing from them is I think the things that they're looking at are the things all of us are looking at relative to interest rates and affordability and such.
But in terms of the momentum and the confidence, I think across many geographies, across many price points in single family, multifamily, even like commercial, I think there's good confidence as we close-up this year and head into next year. And again, I think that's getting supported by a range of builders across a number of segments. So I think we feel good about what's in front of us in 2022, and I think it will have a similar maybe look and feel as we close out 2021, again, around kind cadence and what we're experiencing in the market.
Speaker 6
Hey, Nate. One just quick follow on that. Are you hearing from your customers that they're seeing there was a lot of discussion on this earlier in the year and in 2020, the additions of home office space on homes, the addition of rooms and square footage for home schooling facilities if you needed it, if we're in another lockdown? Or are you seeing a drive towards different floor plans or smaller homes? Any other thoughts around that?
Recognizing you said it's going to be pretty consistent. And then I had a quick one on mass timber. What are your expectations for the growth there? And if you could talk a little bit about your relative level of interest, which seemed to be relatively high last quarter on mass timber and the developments there? Sure.
Speaker 2
Yes. I think in terms of kind of the home footprint and what people are looking for, think the flexibility and kind of the optionality continues to be a theme. I think it's maybe settled down a little bit as things like schooling have gotten maybe a little bit more normalized. And maybe there's a little bit less pressure than there was six months ago or certainly twelve months ago. But I think in terms of the flexibility of the home and what the home needs to deliver beyond the living space, it also has to include, to your point, maybe a home office, some schooling, the kind of the recreation component.
We think some of those trends have continue to be in place. And it's something that we're kind of watching carefully and closely. In terms of mass timber, I'll make a quick comment or two and then hand it over to Mike Brown. Yes, we continue to see mass timber as an important solution in terms of light commercial or high story construction in the marketplace. We think it solves a number of problems on the job site as well as obviously the kind of the carbon capability that wood construction brings as compared to steel and concrete.
But Mike, do you want to add any comments in terms of kind of where we're at and how we're thinking about that opportunity as we move forward?
Speaker 4
Yes, sure, Nate. So I guess, George, I'd add that we're sort of watching with great interest the investments that are being made by some others across The United States, U. S.-based companies and some from offshore. And we certainly looked at with great interest at some of the opportunities that have come to market over the last six to twelve months. But at this stage, we're sort of in that watch and wait and evaluate position.
We believe we firmly believe that there will be opportunities in the future, whether we decide to do it through organic or through acquisition. It's just a matter of timing, and we'll see how that progresses over the next twelve to twenty four months.
Speaker 6
All right. Thanks. I'll turn it
Speaker 4
over, guys. Thank you. Thanks,
Speaker 0
Thank you. Up next we have Susan Maklari of Goldman Sachs. Your line is open.
Speaker 5
Hi everyone. This is Charles Perron in for Susan today. Thanks for taking my question. First, I just want to circle back on the BMD and looking at the EBITDA margins going into Q4. You mentioned that margins should return I think at normal levels.
And given the recent stabilization in commodity prices, do you think a margin performance similar to Q4 a year ago is realistic at this point given the current conditions?
Speaker 1
Yes. So if you look at Q4 a year ago, BMD reported gross margins of 13% and EBITDA margin of 5.5%. I would say if you look for us, a lot of it's going to be about what is the not what the relative value is of commodity pricing, but very much what is the trajectory. Is it up? Is it down?
Is it sideways? And so that will have a large influence on our results in the fourth quarter for BMD. But yes, if we find if the stability we've seen so far in the fourth quarter holds, and then and I suspect EWP and General Line will remain firm, Yes, I would say that gross margin of 13%, that might be that's probably achievable. That's a little bit higher than what we've seen in some normalized periods. But certainly, well we should be well, well above the third quarter results that we just posted.
Speaker 5
Got it. That's very good color. Thanks very much, Kelly. Just a follow-up on the DIY demand. Some of your peers have commented on pickup of activity post Labor Day.
I was wondering if you have seen similar pickup in activity on the lumber side so far? And what are expectations as well going into year end?
Speaker 2
Charles, it's Nate Jorgensen. I think in terms of the to your point on the do it yourself, obviously, the third quarter was a bit of a roller coaster in terms of they were somewhat vacant early in the quarter. And I think, certainly, was good strength and stability as we finished the quarter with that customer segment. And I think we're experiencing that today across the range of products and services across each of our geographies. So I think in terms of our expectation on the repair and remodel segment, especially the professional remodeler, we feel good about how they're thinking about the balance of this year and into 2022 as well.
So I think, again, that little bubble that we experienced in Q3 with that specific customer is largely behind us and feel good about the momentum that's in place today.
Speaker 5
Thanks Nate for that. And just if I can squeeze one last one. Looking at your CapEx guide for next year, it looks like it's up quite nicely versus this year. I understand the variability in there as you mentioned in your prepared remarks, but any project that you want to highlight or any area of your business where you think you want to be adding capacity given the current market conditions?
Speaker 1
Yes. So Charles, let me start and then I can let others jump in as they see fit. So I would not reference that increase in terms of adding capacity. What I would reference it as is really part of our capital allocation strategy, which is to invest in our existing asset base. So in Wood Products, we're certainly going to try to accelerate a little bit and some replacement and infrastructure type spending.
And that's all about for us, as you've commonly heard us supporting our internal veneer capabilities. And so there's some projects in the Southeast we want to get done. There's some replacement infrastructure work at our Oakdale plywood veneer plant, for example. And then we do plan on replacing a dryer at our Chester, South Carolina facility. Do So, expect to get maybe a little bit of cost savings and some efficiencies, obviously, from doing that spending, but it's not about growing capacity.
And then on the BMD side, typically one of the big buckets for them is going to be rolling stock. So tractors, trailers, hysters. And then we're going to have racking and paving. And then we have a few organic opportunities that are embedded in BMD spending in twenty twenty two that we think are going to happen. It's a little too early to specify what those are.
But for them, it's a fair bit of rolling stock and a little bit of organic growth in existing markets that we have today. I would say, given the broadness of the range, that's purposeful, as I mentioned in the comments, just because of the supply chain challenges that we see throughout the world today. And for example, rolling stock, we I suspect that we may be challenged to bring in as many tractors and hysters that we would like to, just given the constraints in the chain.
Speaker 5
All right. Totally makes sense. Appreciate the color. Thanks for time.
Speaker 4
You bet.
Speaker 0
Thank you. And next we have Ruben Gardner of Benchmark. Your line is open.
Speaker 7
Thank you. Good morning, everybody.
Speaker 1
Hey, Reuben.
Speaker 7
A couple of questions on BMD. Maybe first on the volume front. And if you answered this in your prepared remarks, I apologize if I missed it. But the volume decline that you saw, it looks like quick math, largely came on the of the commodity products that you sell. How much of that I guess, can you just talk about the volume decline?
What was the driver there? Was that you guys just kind of being cautious with inventory with where prices were and maybe missing or intentionally missing out on some business to not lose money? Just talk to me about the BMD volume in the quarter.
Speaker 8
Hey Ruben, this is Jeff. I'll start on the commodity side like you spoke of. Towards the second end of the second in middle of second quarter, end of the second quarter, you could see where the market was going. And so I would tell you absolutely, we took our foot off the gas pedal of what we're purchasing, trying to get our inventory for the big decline. And we spent the entire quarter trying to move that inventory out and repositioning ourselves.
On EWP and general line products, we are in an incredibly constrained supply environment. And with managed supply like we have, it really, really is hard to grow and to take share. So our ability to really expand would be limited. I think we did a great job with what we had, but our opportunities are limited there.
Speaker 0
Okay. And then on
Speaker 7
the margin front in the quarter, can you remind us what the lag is to from the commodity moves to when it flows through to your business? For some reason, two weeks is sticking my head. So in other words, I think that the price decline for commodities started, especially for lumber, started late in the second quarter. And the stabilization kind of that started in September, you wouldn't have seen much of that. You basically dealt with the declining environment the entire quarter in your P and L.
Is that right?
Speaker 1
Yes. Certainly, yes. The lag you may have heard referenced in
Speaker 2
the past maybe a little
Speaker 1
bit more like on our Wood Products business in terms of plywood and having order files. And so we didn't see the substantial decline in July in our Wood Products results. But in terms of BMD, as you know, our distribution customers are obviously very educated and they understand where the market is. And so yes, that's pretty real time as the market starts to tip over, our inventory loses value pretty quickly. And we have inventory on the ground and we've also got inventory rolling at us.
So it takes us some time to get out of the way of that.
Speaker 7
And we've heard that there's some shadow inventory out there, inventory that maybe you guys have on the yards or your customers have on the yards that's already spoken for? What's the supply demand environment really like today in the industry from a commodity standpoint?
Speaker 2
Ruben, it's Nate. I think in terms of the in some cases, customers may have projects, and they'll place orders for products and services. And that's maybe not uncommon in areas like multifamily or hotelmotel construction, where they'll buy kind of blocks of material, and that will be delivered over a series of weeks and months. So sometimes that is maybe the element of inventory that is sold but hasn't yet maybe shipped. I think in terms of inventory levels overall, I think, again, there are certain products and services that remain very constrained.
As Jeff described, general line EWP remains challenged, I think, across the channel. And so we don't expect that likely to really change as we finish off this year and head into next year. And I think in terms of commodities, it feels relatively balanced based on what we can see today. Obviously, there's seasonality that will factor into it. But I think customers are looking at year end and making sure that they're measured in terms of what their inventory footprint is, in some cases, tax reasons.
And so we see maybe a little bit more deliberate approach as we finish off this year. But again, in terms of overall confidence on demand as we close out this year, heading into next year on the residential construction as well as commercial, I think, again, there's good confidence and good momentum as we close-up this year, again, recognizing weather could have some impact on that as well.
Speaker 7
Great. Thanks, guys. Congrats on the quarter and
Speaker 4
good luck navigating through the rest of the year.
Speaker 2
Thanks, Rupert.
Speaker 0
Thank you. Next we have a follow-up from Mark Wilde of Bank of Montreal. Your line is open.
Speaker 3
Thanks. Yes, just a few follow ups. Actually, first on the building materials side, are there any pieces of the building materials market where aside from kind of commodity lumber panels where you've actually started to see an easing in any of the supply constraints?
Speaker 8
This is Jeff. Mark, I would tell you, we really have not. It has just continued on and with no one in sight. And on top of that, we're seeing the transportation issues really ramp up as well, which is causing more and more problems.
Speaker 3
Yes. Okay. Great to hear, but it's good to understand it. And then Mike, can you talk about order of magnitude COVID disruptions in the third quarter and what you've seen so far in the fourth quarter? It seems like you've had some issues over the last several quarters, particularly down in Louisiana, but maybe down in Southern Oregon as well.
Speaker 4
Yes, sure, Mark. Yes, you are quite correct. So in the third quarter, I'd say the month of, I guess, was August, my memory is correct, was the worst month that we've had since the start of the pandemic in terms of number of direct COVID cases, obviously, that were needed to be quarantined or through our contact tracing. So it was a really, really pretty tough month. I'd say in general, since then, there's been a sort of steady decline in the number of cases.
So we're in a better position, you want to call it that today than we were a couple of months back. In terms of how that impacted our manufacturing operations, yes, it certainly it did reduce our potential to produce all products. You understand the way we run our integrated model. So I would say as a very, very, very high level rough rule of thumb, maybe we lost maybe 5% of our production, but it was sort of spasmodic in different mills at different days, different weeks. And so what we tended to do was juggle the crews that we have in each of the locations to sort of cover each of the machine centers to maximize the production that we could with the people that we had.
So it wasn't at the end of the day, it wasn't a huge impact to our manufacturing on a volume basis, but our associates did a tremendous job. And they worked a huge amount of overtime. And I think that's really how we managed to get through the quarter without seeing a more significant reduction in manufacturing volume.
Speaker 3
Okay. And Jeff, did it have any impact, would you say, in the third quarter in Nutrition business?
Speaker 8
I would tell you on the business itself, the impact was relatively associates. It didn't impact on what we could do, but they're always felt like there's a few people out and so we were relying on the other people to pick for them and they did that. Just kind of what Mike said as well, associates did an unbelievable job carrying that water for each other, but no real impact to the business other than that.
Speaker 3
All right. That's helpful. Last one, I'm just curious. We are seeing kind of this continuing trend of consolidation in the wood product sector. And I wonder if that's having any impact on your business, particularly the distribution business.
I'm very conscious that one of your longer term kind of strategic partners was involved in a transaction earlier this year. So does that can you just talk about any kind of potential ripple effect this process is having on your business?
Speaker 2
Mark, it's Nate. I think in terms of the consolidation, I think that's something that we've obviously, to your point, have seen and really have expected kind of throughout the channel. I think for us, for Boise Cascade, I think one of the things that I think we've been able to deliver is a level of consistency and predictability on both businesses for a period of time. And so when there are changes in the channel and consolidation, I think we represent that like a level of consistency and predictability that I think our customers and our suppliers really depend upon as we go through this. So my view is that we'll likely see more consolidation, more things happen.
But in terms of, I think, our consistency in terms of who we are, what we do and putting our balance sheet to work, feel good about, again, how we're positioned and what we can do in support of our customers as we move forward.
Speaker 3
Okay. All right. That's very helpful, Meta. Good luck in the fourth quarter and looking into next year.
Speaker 2
Great. Thanks, Mark.
Speaker 0
Thank you. And we have a follow-up from George Staphos of Bank of America. Your line is open.
Speaker 6
Thanks. Hi, guys. Just a couple of cleanups for me. One, if you hadn't mentioned already, can you just talk a little bit about what you think wood cost will be into fourth quarter? And to some degree, if you have any kind of view recognizing it could change quite a bit into the first quarter?
And then can you update us on what you're seeing right now in terms of imports of plywood from South America into your key markets?
Speaker 4
Sure thing, George. Yes, it's Mike. So last question first. So if you look at the import volumes of recent time from Brazil, they've declined massively. So that would be last day dry store was September, and I think the import volume from Brazil was like 55,000 cubes.
That was down by about two thirds compared to the highest volume, which I think was a couple of months before that. It was like 165,000 cubes in maybe July. So it's come off very, very considerably. However, if you look at the year to date number, it's actually up like 30% year over year. So a lot of volume came in, I'll say, the first half of the year.
Speaker 6
Hey, Mike, what's going on there do you think? I mean, it wouldn't is it just going into Europe at a later part of the year relative to what is typically the seasonal trend? Or is it anything related to the trade case and the certification issue that exists between U. S. And Brazil or something entirely different or not clear, which
Speaker 4
Yes, perfectly fine answer as yes and yes. So I think what
Speaker 0
I
Speaker 4
would say, George, is ocean freight, as we all know, has just ballooned. Mean I it's just unbelievable what a container cost these days. So on a landed basis, while our pricing was terrible for plywood relative to the past, that certainly turned the importers off, the Brazilians in particular. But on a landed basis, with the cost of freight imputed in the final delivered number, that really impacted them very severely. They did have at some point in time in Brazil, they're going back a few months, they had some very significant COVID related activities.
And that sort of overlapped with the reduction in plywood prices here in The U. S. So some mills in Brazil curtailed quite significantly. So that reduced the total volume. And then to your very good point, yes, it's about that time of the year again, where the Brazilians, not only the Brazilians, but particularly the Brazilians, send their eyes to Europe because there's that quota.
I think it's that first 600,000 cubic meters of plywood that enters Europe is tariff free or tax free. I think that's between 68%. So there is that going on as well. So a combination of factors. So I guess we'll see what happens going into next year.
And then you've got the wood costs. I think you're probably referring most specifically to log costs. Log costs in the South are pretty much flat and have been flat and continue to be flat. I would say as some of these saw mills start to ramp up, and you've heard or seen all those announcements, We'll wait and see how that plays out. There could be some specific geographies that have additional pressure.
And I don't see it ramping up significantly in the very, very near future. But there could be a little bit of increase, I'll say, over the next five to ten years as all these mills come online.
Speaker 5
Okay. So I mean there's been
Speaker 6
a steady creep in the South upwards for a change, I would say. But from your standpoint, nothing significant, nothing adjust your operating plan. You wouldn't adjust an operating plan per se on that, but nonetheless, nothing that's significant in your view in terms of calling a new trend.
Speaker 4
I would not do that, George. No, I think creep is the right word. It's been creepy since I was young. And then in the Pacific Northwest, obviously, over quarter quarter three last year relative to quarter three this year, the Pacific Northwest slab costs were up very, very significantly. And they're sort of kind of plateaued, I would say, the moment.
Obviously, with lumber pricing coming off, which is really the major determinant of log prices, We might see a little bit of creep down, but I don't think it will come off very significantly anytime soon because we're starting to see a little bit of increase in lumber pricing.
Speaker 2
So
Speaker 4
I'd expect I would probably suspect that the Pacific Northwest log pricing is going to be relatively, I'll say, flat or consistent going into 2022.
Speaker 6
Thank you very much.
Speaker 2
Thanks, George.
Speaker 0
I see no further questions in the queue. I will now turn it back over to Kelly Hips for closing remarks.
Speaker 2
I'll take this, Chris. It's Nate Jorgensen. Again, just to quickly close, we appreciate everyone joining us this morning for our product data. And thank you for your continued interest and support of Boise Cascade. Please be safe and be well.
Thank you.