Good morning. My name is Sydney, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Boise Cascade's second quarter 2020 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star and then the number one on your telephone keypad. Questions will be taken in the order that they are received. If you would like to withdraw your question, please press the pound key. 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 Wayne Rancourt, Executive Vice President, CFO, and Treasurer, Boise Cascade. Mr. Rancourt, you may begin.
Thank you, Sydney. Good morning, everyone. I'd like to welcome you to Boise Cascade's second quarter 2020 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 Stokes, head of our Building Materials Distribution operations. Turning to slide two, I would point out the information regarding our forward-looking statements. The appendix of the presentation includes reconciliations from our GAAP net income to EBITDA and adjusted EBITDA and segment income to segment EBITDA. I will now turn the call over to Nate.
Thanks, Wayne. Good morning, everyone. Thank you for joining us for our earnings call today. I'm on slide number three. Our second quarter sales of $1.2 billion were up 1% from second quarter 2019. Our net income was $33.6 million, or $0.85 per share, compared to net income of $27.7 million, or $0.71 per share in the year-ago quarter. Total U.S. housing starts decreased 17% compared to the same period last year. Single-family starts, the primary driver of our sales volumes, also decreased 13%. Despite the decline in new residential construction activity, our operating and financial performance at both businesses was strong in this unprecedented environment. Our Wood Products manufacturing business reported segment income of $17.1 million in the second quarter, compared to $18.9 million in the year-ago quarter.
Wood Products' continued focus on manufacturing cost improvements was especially notable given the production schedule modifications and temporary curtailment actions taken in the second quarter. Our Building Materials Distribution business reported segment income of $43.2 million on sales of $1.1 billion for the second quarter, compared to $33.8 million of segment income on sales of $1.1 billion in the comparative prior year quarter. BMD sales and income were robust in our long-term strategy and commitment to consistently carry a broad base of in-stock products, supported by high service levels and solid financial position, continues to deliver value to our vendor and customer partners in the supply chain, as well as our shareholders. Wayne will walk through the financial results in more detail, and then I'll come back to provide an update on our ongoing response to the COVID-19 impact on our businesses and our outlook before we take your questions.
Wayne?
Thank you, Nate. I'm on slide four. Wood Products sales in the quarter, including sales to our Distribution segment, were $282 million, compared to $334 million in second quarter 2019. As Nate mentioned, Wood Products reported segment income of $17.1 million in the second quarter, compared to $18.9 million in the prior year quarter. Reported EBITDA for the business was $31 million, down from EBITDA of $33 million reported in the year-ago quarter. The decrease in EBITDA was due primarily to lower sales volumes and prices of EWP, as well as lower lumber sales prices. The decreases were offset partially by increases in sales prices for plywood and lower wood costs. BMD's sales in the quarter were $1.1 billion, up 3% from second quarter 2019. Sales prices increased 4%, while sales volumes were down 1%.
The business reported segment income of $43.2 million or EBITDA of $48.8 million in the second quarter. This compares to segment income of $33.8 million and EBITDA of $38.8 million in the prior year quarter. The increase in segment income was driven primarily by a gross margin increase of $16.3 million, resulting from improved gross margins on commodity products compared with second quarter 2019. This improvement was offset partially by a $5 million increase in selling and distribution expenses. 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 $8 million in second quarter 2020, compared with $7.3 million in second quarter 2019. Turning to slide five, our second quarter sales volumes for I-joist and LVL were down 18% and 16%, respectively, compared with second quarter 2019.
We adjusted our EWP mill operating schedules early in the second quarter in response to the initial COVID pandemic impact on new residential construction in certain geographies. We have been increasing our production schedules as demand re-accelerated through the second quarter. We are seeing stronger EWP demand continue into the third quarter. Pricing in second quarter for LVL and I-joist were both down 1% compared to first quarter 2020. Turning to slide six, our second quarter plywood sales volume in Wood Products was 314 million feet, compared to 343 million feet in second quarter 2019. The lower volume for plywood sales reflects modified production levels in response to expected weaker market conditions early in second quarter. The $287 average plywood net sales price in second quarter was up 6% from second quarter 2019.
Plywood demand and pricing in the second quarter was stronger than we expected at the time of our last earnings call. Pricing and demand for plywood has remained strong early in the third quarter. We expect plywood prices to moderate as capacity restoration takes effect and mitigates the current supply-demand imbalances in the marketplace, and seasonal impacts on demand take place later this year. The pandemic circumstances are limiting the ability of the industry to quickly respond with additional production. Plywood pricing thus far in the third quarter is approximately 30% above our second-quarter average. Moving to slide seven, BMD's second-quarter sales were $1.1 billion, up 3% from second quarter 2019, with prices up 4% and volumes down 1%. By product area, BMD's commodity sales increased 9%, general line product sales increased 4%, and EWP sales decreased 10%.
The gross margin percentage for BMD in second quarter was 13.4%, up 100 basis points from the 12.4% reported in second quarter 2019. The gross margin increase resulted from improved gross margins on commodity products compared to second quarter 2019, as well as an increased proportion of the sales occurring out of warehouse rather than direct. BMD's EBITDA margin was 4.3% for the quarter, up from the 3.5% reported in the year-ago quarter. As COVID-19 restrictions were loosened, construction activity resumed mid-second quarter and continued at a robust pace through the end of the quarter. Our BMD warehouse sales were particularly strong as our retail lumberyard customers are relying on our broad base of inventory and high service levels to minimize their working capital investment, given COVID-19-related uncertainties and elevated commodity product prices.
We have had strong demand from our home center customers in response to elevated repair and remodel and do-it-yourself activity as people are spending more time at home during the pandemic. The combination of re-accelerating construction activity and capacity curtailments of commodity products across the industry created supply and demand imbalances in the marketplace during the latter part of the second quarter. Commodity Wood Products pricing continued to move sharply higher in July. Commodity product pricing may be volatile as we move through the third quarter and head into the end of fall. Pricing movements from current levels will likely be determined by the strength of end market consumption and industry operating rates. Current composite panel and lumber prices are more than 50% above second quarter 2020 averages.
Turning to slide eight, you can see the sharp rise in lumber pricing in second quarter, which has extended into the first part of the third quarter. Most of the major lumber producers made efforts to restore production in the back half of the second quarter in response to improved demand and the pricing situation. On slide nine, you can see the same pricing pattern for the Random Lengths Structural Panel Composite Price, which has caused many manufacturers to work toward restoring their production to near pre-COVID levels. 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, decreased $89.7 million during the second quarter. Both businesses reduced inventories during the quarter.
Distribution inventories decreased due to stronger-than-expected demand and higher inventory turns, while manufacturing inventories decreased due to reduced production levels in anticipation of lower market demand. Accounts payable increased from first quarter due to seasonally higher purchasing activity for general line products. The statistical information filed as Exhibit 99.2 to our 8-K has the receivables, inventory, and accounts payable data broken down by segment for those that are interested in more detail. I am now on slide 11. We finished second quarter with $361 million in cash on the balance sheet. Our total available liquidity at June 30 was approximately $707 million, which reflects our cash and availability under our committed bank line. We had $440 million of outstanding debt at June 30, 2020. On July 27, we issued $400 million of 10-year notes with a 4 7/8 interest rate.
Proceeds from the offering will be used to retire our $350 million of 5 5/8 note due 2024, as well as a $45 million secured term loan. Both of those events took place last week. We expect to recognize a pretax loss on extinguishment of debt of approximately $14 million during the third quarter of 2020, the majority of which represents the call premium on the existing 5 5/8 notes. In addition, we announced to plan participants in our pension that we will freeze accrual of all benefits on our qualified benefit pension plan effective August 31st, 2020, as well as our intention to terminate the pension plan. As part of the plan termination process, we expect to repurchase two BMD locations leased from the pension plan for approximately $12 million.
We do not expect the plan termination to result in a meaningful amount of additional cash contributions to the pension plan. We intend to enter into an agreement with an insurance company to transfer all of our remaining pension assets and liabilities as soon as practicable. In response to the uncertainty of the impacts of COVID-19, we previously announced a reduced capital spending range of $50 -70 million. Our strong financial results and cash position will likely result in us being toward the upper end of that $50- 70 million range. We expect our effective book tax rate to be between approximately 25% and 30% going forward. I will now turn the call back over to Nate to discuss our COVID-19 business update as well as the outlook.
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 whom we do business. It is important that we support our community efforts and conduct our business appropriately based upon the guidance from the CDC and others. Wood Products is in the process of attempting to restore production rates to pre-COVID-19 levels in response to strong end product demand. However, we continue to experience periodic short-term disruptions at many locations due to COVID-19. In addition, we expect activity levels across our distribution network to continue to vary widely as COVID-19 impacts geographies across the U.S. to differing degrees and federal, state, or local restrictions are implemented or rescinded.
To date, we have not experienced significant supply chain disruptions that would limit our ability to meet customer delivery commitments or source the necessary raw materials and finished goods needed by our operations. We continue to conduct business with modifications to mill and distribution center housekeeping and cleanliness protocols, employee travel, employee work locations, and virtualization or cancellation of certain sales and marketing events, among other modifications. We continue to actively monitor evolving developments and may take actions that alter our business operations as may be required by federal, state, or local authorities, or that we determine are in the best interest of our associates, customers, suppliers, communities, and stockholders. I'm on slide number 13. The Blue Chip consensus for U.S. housing starts was last published at an expectation of 1.19 million for 2020.
Although we believe that current U.S. demographics support a higher level of housing starts, the impact of COVID-19 on residential construction are uncertain. Beyond economic uncertainties, the pandemic may improve the demand for single-family residential construction as homeowners consider a transition to less densely populated geographies. Furthermore, with homeowners spending more time at home, repair and remodel spending may continue to strengthen as homeowners invest in existing homes. We are seeing favorable cost improvements and efficiencies in our manufacturing operations. Wood Products will continue to manage production levels appropriately in this volatile COVID-19 environment. In our distribution arena, BMD has done a terrific job of executing and responding to market opportunities at both the local and national level. Effectively managing the impacts of commodity price changes will remain at the forefront for our distribution group in the second half of this year.
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 your continued support and interest. We would welcome any questions at this time. Sydney, would you please open the phone lines?
Certainly. Ladies and gentlemen, if you have a question at this time, please press the star and the one key on your telephone. To withdraw your question, please press the pound key. Once again, that's star one to ask a question. Our first question comes from Brian Maguire with Goldman Sachs. Your line is open.
Hey, good morning, Nate. Good morning, Wayne.
Good morning, Brian.
Just a question on the current supply and demand dynamics, which you referenced several times. It's very tight in the market. Just wondering if you could talk about where your own operating rates are on plywood and EWP. Related to that, in the plywood market, maybe if you could just talk about how far out your order books are going. I know once you get past two or three weeks, it indicates a pretty tight market. I'm guessing we're probably beyond that given how tough it is to find product these days. Can you just comment on how far out you've been able to lock in the current exceptionally good prices? Are we basically locking in the month of August and parts of September at this point?
Is there a lot of your volume that would still be at risk for lower prices in the third quarter?
Yeah, good day, Brian. It's Mike Brown. On the operating rate side, as I'm sure you've heard from many others, we're attempting to ramp up. I'd say, as a general statement, we're sort of running 5.5 to sort of six days a week where we can. We have some intermittent sort of downtime associated with either positive COVID cases or losing people through contact tracing. It varies week from week, but somewhere around that 5.5 maybe to six days a week, depending on the location. We are trying to ramp up, but we're having great difficulty finding people to bring to work for a variety of reasons. I really don't see us getting to a much higher operating rate anytime soon. Certainly our intention, but that might take us a few months. As it relates to our order file.
Our current order file on the plywood side of the business extends through August and in a couple of locations now into early September. We've been able to lock in the good prices that Wayne was talking about just a moment ago. What will happen after that? Your guess is as good or better than mine. We'll just have to see how long the good run lasts.
Great. I appreciate that. Just with the demand side, I think you guys talked about it, so much of it's coming from repair and remodel these days. Obviously, there's a lot of people at home with a little bit more time and with the stimulus money, maybe a little bit more disposable income. You guys usually have a pretty cautious or at least balanced outlook on the market, I find. To what extent do you worry that some of this is just pulling forward some demand that would have otherwise been there, but maybe would have been spread out over the next 12 months? Just kind of the concern that we hit an air pocket eventually as some of the stimulus money runs out or as people need to eventually go back to work?
Hey, Brian, it's Nate. I'll take a shot at that. I think the consistency that we've seen from the repair and remodel has been really, really strong since the start of COVID-19, and we really haven't seen anything that would signal a change to that. To your point, the financial position, including the stimulus money, has been helpful. I think for people in terms of investing their spend rate on things like vacations and other activities has been reduced significantly. Obviously, they're spending more time at home. I think as we get a chance to see the trends, look at the repair and remodel confidence index, it would continue to suggest good momentum moving forward. Likely the question around sustained unemployment levels at high levels is usually not constructive for a lot of spending activity, either new residential or repair and remodel.
At this point, the kind of the momentum and the cadence that we're seeing on repair and remodel, we expect that to continue, and again, it's been very consistent throughout the course of COVID.
Okay, just last one for me. Just switching over to the Wood Products business. I think you just talked about what the utilization rate is on that part of the business, and I know there was some new industry capacity coming in, just if you're seeing any impact from that on your partnerships in the distribution channels or any impact on pricing that you might be seeing from that?
Yeah, Brian, it's Mike again. I'll last bit first. It relates to the new capacity, I think you're referring to the Roseburg facility in Chester, South Carolina. They're still in a ramp-up phase. We really, at this stage, have seen very modest, if any, impact from the volume and/or pricing. There's been a couple of specific regional situations, nothing of any great significance. I have no doubt sooner or later they'll get through their ramp-up stage, and there'll be more volume come online. Thus far, it really hasn't been a major contributing factor. It relates to operating rates in our EWP mills, we have very strong order files.
As a result of that, I think we will be running quite hard in the EWP side of the business for quite a while, which sort of lends some credence to the fact that for the, say, the previous number of months, mainly, I'd say, at the dealer level, folks really took their inventories down a long way. I'm sure whether it's the dealers or the builders, they're building inventory in their channel, and I suspect that that's going to go on for quite a while, and the results that I've read from the builders that have released numbers show some pretty strong numbers, actually, for the last number of months. Their prognosis is, I guess I would call it quietly optimistic for the remainder of the year.
Brian, that's part of the thing that's tensioning the plywood market at the moment, is you have a lot of veneer that's getting diverted into EWP manufacturing. There's a limited ability of the plywood guys to come back on with a lot of incremental volume with the EWP demand being strong.
Yeah, I was going to ask that, but I didn't want to be too greedy with questions. Just thinking about how much of your veneer you're trying to shift over to the plywood market to take advantage of the exceptionally good prices these days. Yeah, sort of makes sense that there's a natural tension between the two.
Yeah.
I think-
Brian, there's only so much veneer that I'll say is appropriate to put into EWP, and we're putting all that veneer we can possibly muster into EWP at the moment, even with these good plywood prices.
Okay. I appreciate the time. I'll turn it over.
Thank you.
Thank you. Our next question comes from the line of George Staphos with Bank of America. Your line is open.
Hi, everyone. Good morning. Thanks for all the details. I wanted to come back to the mix shift that you've seen in BMD from what had been direct to warehouse sales, which has helped margins. My guess is a lot of that is being driven by increasing confidence from builders, but not enough confidence to buy large orders direct. That's helping BMD. If that's a correct assumption, if not, obviously, please go into what's been driving that. Do we have to worry about a mix shift to the negative at some point, as in fact, we see more confidence in sustainability of this improvement in building activity?
Hi, George. This is Nick Stokes. I think your initial presumption is part of the answer. Certainly, as dealers anticipated declines in their demand in late March, early April, and the combination of the uncertainty associated with COVID driven by that, I think they, for many of them, made the determination that they wanted to run a little bit lean. When demand bounced back, their inventories were a little lean. Order files were extended primarily on the commodity products. Really, it's a combination of the two. A, a little bit of uncertainty in terms of what their demand's going to be, and B, a little bit of uncertainty and concern about buying six weeks out at relatively high prices. The combination of those two things prompted behavior where they could buy it in a shorter timeframe, in smaller quantities, kind of just in time.
As to your speculation about does that reverse course over some period of time, I don't worry about that too much, really, because certainly if demand becomes more predictable and order files and prices become more predictable, we're kind of back to a status quo as opposed to a big swing to the negative.
Okay. Thanks for that, Nick. I realize it's hard to answer this because it's multiple parts and it's ultimately a high-class problem to have. When you look at the incremental margins in BMD in the quarter, I haven't recalled one that was this large in quite a while. If there's a way to parse the 20% incremental margin versus what would normally be, say, 4%-5% and how that arose, whether it was inventory gains, commodity pricing, however you felt most comfortable ascribing it, if at all, that'd be helpful.
I'll give it a whirl here. Certainly when the composite price index has run up $100 or $200 or $250.
Yep
That's where we're at today. I realize we're a month into the third quarter. You think about the embedded inventory costs that we have and the valuation in the marketplace. I would ascribe the increase in our gross margins primarily due to escalating, dramatically escalating commodity pricing.
Yep.
As you know, that prompts volume as well as excuse me, volume as well as margin. Certainly, the second quarter is usually a very good quarter for us in terms of mix shift of seasonal products. Given what has already been described about repair and remodel products like decking jumps up pretty hard. It's a combination of all the above, and we don't spend a lot of time trying to articulate externally the unique attributes of each one of those at a very finite level.
Okay. Understood. It sounds like it was what we'd expect. Most it was driven by the benefit you got on pricing relative to your cost.
Yeah, don't miss the volume piece as well.
Okay. Fair. My last two, and I'll turn it over. Real quick, Wayne, from the pension plan adjustments, once you're done with all the transacting that needs to occur on an ongoing basis, is there much of a change in the ongoing cash flow? Then to the extent that we're seeing more housing activity, hopefully, we ultimately get back up towards 1.3, 1.4, 1.5 in terms of starts. Should we worry much at all about a mix shift to smaller homes as urbanites try to become suburbanites and therefore a shift away from EWP to dimensional? You'll worry about that when you have to because it'd be sure nice to get to 1.3, 1.4, 1.5. Thanks, guys.
Let me take the pension one first, and then I'll talk about the housing. On the pension, we've had very modest cash going out from a GAAP standpoint, because as we pay lease payments on the two BMD properties, and as we fund our non-qualified pensions, those show up in the cash flow statement as pension contributions. The lease payments we're making on the BMD properties will go away, and we'll still have a very modest number that will flow out on the non-qualified pensions. We're also looking at legally whether or not we'll terminate those. The cash obligations is probably about $1 million a year. It's very small.
On the housing question, I think there's been a trend of really the last 18-24 months or more of median home sizes declining, and part of that is a lot of the big builders have been trying to hit entry-level homes. To your point, we've probably lost about 200 sq ft per start, or maybe a little more than that. I would suspect within the COVID-19 environment, that there's a lot of the larger builders that are building spec homes, and they will be a smaller footprint and trying to pick up people that are trying to relocate out of a multifamily environment or a major metro area. That's where we'll see a lot of the demand. Even with the smaller footprint, those homes relative to a multifamily start are probably still close to a 3x.
In terms of the material demands, while it may not be the same as a 2,800 or 3,000 square foot home, somebody's building something at 2,400 square feet versus building a multifamily unit, that's still a net positive for us.
Sure.
That's certainly been the case in May, June, and July as we've seen them ramp up in housing starts again.
Thank you very much.
Thank you. Our next question comes from Mark Wilde with Bank of Montreal. Your line is open.
Good morning, and congratulations on a great quarter. My first question is one for, I guess both Nick and Wayne, and that really revolves around sort of managing kind of commodity price risk, commodity volatility. You've done a great job over time, but we all remember 2018. I wondered if you could give us some insights into specifically how you manage commodity price risk when we're seeing so much volatility. If there are any signs that you watch for that would suggest to you we're nearing a top. Are there any kind of yellow flags that you have learned to watch for over time?
Morning, Mark. I'll take a whirl at it. As we've tried to articulate in the past that the commodity strategy that we have in all periods of time is underpinned by two primary assumptions. We want to be buyers and sellers every day. We've made commitments to our customers to have product available that's quicker than alternative sources, if you will. We believe that creates some value for the customer as well as allows us to make a margin because of our ability to deliver it promptly. We've also made commitments to our suppliers to be constant buyers. Those are the two underpins. As you navigate your way through the ups and the downs, we don't try to get too frisky about outguessing ourselves here.
As you've seen over the years, when you get the kind of run we've had for the last quarter or so, our on-sale margins and our net margins in terms of return on sales both escalate pretty dramatically, particularly given the dramatic nature of it. When it contracts, we give it back a bit. We believe this buying and selling, knowing what our customers want every day, keeps us from the wide swings. Now, we always have cases where we buy stuff and sell it for a loss if it goes down pretty dramatically. To your question about what are the red flags and how do we feel about that right now, I would tell you that we've spent a lot of time focusing on what our customers expect to happen and what their behavior is sort of predicted to be, and we continue to do that.
At this point in time, customers increasingly tell us that they're pretty busy, they're pretty uncomfortable with these extended order files and the long time. It gives us more confidence in making sure we have inventory. I would tell you that some of the tools that we've used in terms of the yellow flags in the past don't really apply today. I remember 2013, and I remember 2018, and we all said this thing could never go down, but we always knew that it would. I think our strategy associated with the expectation that these kind of levels are probably not, in the long term, sustainable. We'll just manage it as best we can. I wish I had some kind of a secret herring that I could secret handshake that I could tell you what it is, but I don't.
It's kind of the basic stuff.
Okay. Nick, I'm just curious, is transportation and logistics an issue right now? I've heard things about sort of the rails, particularly in Western Canada, taking a lot of car capacity out early in the second quarter and then being kind of slow to bring it back. I've also heard kind of crazy situations where you've got Pacific Northwest lumber producers shipping stuff by truck all the way to New England, which is just mind-boggling.
Yes. What you're hearing is the same thing we're experiencing, Mark. I'm not smart enough to figure out the root cause of that, but certainly the escalated volumes, and I think in a lot of cases, we're hearing from transportation providers that they're challenged with crews associated with reductions for COVID. We've got a pretty good backlog right now of late cars, which is a combination of mills running a little bit late in terms of production as well as transportation snafus. To some degree, it makes the challenge associated with having a predictable supply chain very difficult. On the other hand, it really makes a case for that it's an opportunity for BMD because to the extent the rest of the world is challenged and we have product available for immediate shipment, it's a hell of an opportunity for us.
Yeah. Okay. The last one I had in distribution, Nick, was just to maybe talk about the decking business, and I'm curious about two things. One is, does composite decking, has that benefited from just the tightness in the treated wood markets over the last three or four months? Are you seeing anything in terms of increased competition, incremental capacity, coming in from some of the smaller players in composite decking?
I think it's a pretty good observation, and I can tell you what our experience has been. I don't want to speak for our primary decking supplier. I'll leave that to them. As is widely noted, there's been shortages of treated decking material, and I think the composite decking manufacturers think of conversions from wood as one segment of opportunity for their growth. I'm sure they would tell you that that's occurred to some degree. Our experience within BMD is that our decking business is very strong, driven, A, by the conversion from wood a little bit, but just in terms of other people wanting to do the projects and some of the product mix that we've been selling wouldn't normally be a conversion from wood, just given the price and grain characteristics and those kinds of things.
As to the question about additional composite decking manufacturers bringing on new capacity, I don't have any knowledge of that one way or the other, Mark.
Okay. All right. Last one from me is, Wayne, can you just talk about kind of cost headwinds potentially in engineered wood in the third quarter? I'm conscious of kind of West Coast log prices perhaps moving up. Also, if you can just remind us the impact from higher OSB prices.
I'll take a shot, and then I'll let Mike add to it. As far as input cost, I think the most notable change is going to be on OSB. We have a trailing average contract, and obviously, with prices moving up as sharply as they had, as we drop weeks off the back end, we'll replace them with weeks at a higher price. I would expect our OSB cost to go up fairly substantially as an input to the I-joist. We use about one square foot of OSB for every lineal foot of I-joist. As far as lumber cost impacting EWP, we do have a solid sawn flange that we use in New Brunswick at our small I-joist facility, so we'll see a little bit of cost input pressure to the extent lumber pricing impacts that facility.
Again, it's a relatively small part of our overall EWP production. Then in the Northwest, as you noted, there's been some movement in log costs. I would expect spot pricing for logs in the Northwest to move up. We really haven't seen much in the way of log cost escalation in the South, and given standing inventories in the South in the forest, I wouldn't expect much escalation in log prices in the South other than potentially cut and haul costs going up as demand recovers if there's issues around transportation. It would be more transportation driven than stumpage driven in the South.
Okay, that's super helpful. Thank you. Good luck in the third quarter and the rest of the year.
Thanks, Mark.
Thanks, Mark.
Thank you. Our next question comes from Reuben Garner with The Benchmark Company. Your line is open.
Thank you. Good morning, everybody.
Good morning, Reuben.
Most of my questions have been asked, but maybe I think I just have one left. If we see housing starts growth return this quarter, is there any reason or I guess, could you discuss the reasons why your growth may be more or less, whether it's your capacity availability in EWP or geographical differences between what the broader market might be seeing or smaller homes has been mentioned. Is there any reason why we wouldn't expect your volume growth in Wood Products to be kind of comparable to a starts ramp?
It should be comparable because with our national footprint through BMD in particular and our other wholesalers that we sell through, the manufacturing operations are distributing nationally and can respond basically wherever there's geographic strength. I think particularly on the wood product side, it will mirror what happens on a national basis.
Okay, actually, I do have one other one I'm going to sneak in. EWP pricing, I know there was some expectation that you might see pressure there, at least earlier in the year. Has anything that's gone on, the expected ramp in growth, maybe a shift in where houses are being built, the inflationary environment in any of your input costs, is there any reason why maybe you could potentially actually push price in EWP? Maybe just talk about what the price cost environment looks like for you guys. I know you just kind of laid out some high-level thoughts, how does that stand from a price cost standpoint for you and EWP? Thank you, guys, and congrats on the quarter.
Yeah, I'll let Mike add onto this, but as a general rule, we do not price our EWP based on cost inputs. It's based on supply and demand, and right now, the demand is quite strong. A lot of lead times have stretched out for EWP for ourselves and others. We're trying to keep all of our service programs in place, and so far, we've been pretty successful in doing that. The tension on the supply and demand is what would drive the pricing on the EWP. To your point, if prices stay flat on EWP, we will see some margin compression with OSB costs and lumber input costs going up.
I think we'll know more as we get into August and September in terms of how sustainable the demand is moving into fall, and that strength would be what would drive a price increase, not input costs.
Thank you. Our next question comes from the line of Steve Chercover with D.A. Davidson. Your line is open.
Morning, Steve.
Yes. Good morning, everyone. Forgive me, first of all, my memory's not great, but are there any facilities that were running in Q2 2019 that were not part of the family in the quarter that just ended?
I believe the footprint was the same, other than Roxboro, which was producing at a very limited level.
So-
It shouldn't make much of a change at all year-over-year.
Got you. We've got commodity prices are up about 30%, running full blast to the best you can, with the exception of maybe some COVID absenteeism. In Q2, you basically started with April down, or maybe operating rates 70% in April, and then ramping back up as fast as you could. Do you think with a full quarter of full production, we could see the margins creep into the mid-teens in Wood Products?
I'm going to jump in here, Steve. I wish I was as optimistic as apparently you are. Not from the fact that we're not trying to run full blast, I think, was the expression you used, but we're not running full blast, man. Particularly in the Southeastern United States, we're tracking, obviously, the impacts of COVID-related issues. You're right. Quarter over quarter, we took out, round numbers, roughly about a quarter of our plywood production capacity, which, on the last call last quarter, we said we were going to do all that, well, we did. The challenge is we are unable at this point in time to run all our facilities 24/7. At best, it's five and a half to six days a week, and we're having a desperately difficult time getting enough people to ramp back up to seven days a week.
If we could, I can assure you we would. I think it will be some number of months at least, given the number of people that we are looking for, before we could honestly say that we would be able to run 24/7.
In response, Steve, to your comment, if the pricing levels we've seen at the end of July were to hold through the month of August and into September, you would see a substantial step change in the operating margins on the Wood Products business, purely due to price on plywood. While it wouldn't be quite as good as running seven days a week, the profitability jump in Wood Products would be substantial in the third quarter.
I'm looking at slides eight and nine. This parabolic move in the lumber and the panel comps, that's going, give me a parachute or something. It's incredible. With respect to the pricing in engineered wood, clearly as the solid sawn substitutes go up, they become more compelling. Also as OSB as an input goes up, you want to recoup that. Is there anything in the pricing mechanism that prevents you from putting in a price hike at this point in time, or is it because things are negotiated kind of far in advance?
Steve, as it relates to EWP pricing, and this is kind of what Wayne touched on just a moment ago, we look very carefully at each individual market and what's happening in the market and our ability to service the customers in that market, and also obviously that relates to how much on-the-ground inventory we have and our manufacturing footprint to be able to basically produce product every day. I think just at the moment, the issue is more around the strong order file we have. The amount of volume we're moving through the system is not quite as high as we'd like. As I mentioned, we're not running 24/7. Our own inventory, on-the-ground inventory levels are not quite where we'd like them to be.
I'm not saying that there wouldn't be an opportunity for some price adjustment or increase a bit further down the track, but right at the moment, we're focused on servicing our customers and getting our inventory in shape before we take that particular issue under further consideration.
Okay. I recognize I'm late in the call, so hopefully my questions may be a bit repetitive, but hopefully not full-blown redundant. What is the biggest risk for distribution aside from maybe a one-two punch from COVID? Is it a rapid decline in commodity prices? Mark Wilde alluded to 2018, that would leave you with an inventory write-down. I know you guys turn your inventory quick. Is that the biggest risk?
Steve, this is Nick. I think certainly in the next 60, 90 days, if the prices previously described come off dramatically, we will have inventory that's not worth as much as what we paid for it. We'll have that dynamic, but as long as demand remains strong, to your point, we'll continue to turn those inventories. We want to be, again, buyers and sellers every day, and we got to find a price that the customers are willing to pay, and sometimes that's a short-term whackin, but it keeps the wood flowing.
I think the other risk that I think a little bit about is really not anything we're going to be able to control, and we've made allusions to it several times in the call today, is kind of the overall impact of COVID-19 and our ability to keep locations staffed and the ability to have locations continue to operate against the backdrop of municipal guidelines and those kinds of things. We've been living that for the last five months, and you can speculate on that till the cows come home, but you won't be able to react to it till you wake up one morning and deal with it.
Yeah. All right. Well, thanks, everyone. Stay safe.
Thanks, Steve.
Thank you. Our next question comes from George Staphos with Bank of America. Your line is open.
Thanks. Hi, guys. Thank you for taking the follow-ons. Two quickies for the end. One, can you just give us a quick update on the latest with the door shop strategy, how that's progressing? Recognizing that ultimately you wanted to balance veneer between ply and EWP and, to some degree, keep markets tight in both areas, any thoughts at this juncture about maybe needing some more veneer capacity down the road? Any update there would be great. Thanks, and good luck in the quarter.
Hi, George. This is Nick. I'll take the door shop. As we've articulated to this audience before, we continue to believe that expanding our door fabrication and pre-hanging ability is a big strategic opportunity. We've taken a lot of steps over the last few years to both add to our existing capacity as well as venture into some new markets. At the first part of the year, we were in line to start up our Texas door shop in Dallas. That was delayed by 45 days, call it, just because of equipment and kind of the impact in COVID-19 late in the first quarter, beginning of the second quarter. Having said that, we're fully ramped up. We're fully staffed. We've got the equipment.
We've been running really hard the last 40-ish days, and we're very happy with the level of sales, the degree of customer interest, and the level of supplier support in kind of a difficult supply environment. We're pretty happy with what we have. We're going to continue to invest in our existing facilities to increase capacity and broaden the volumes and the capability as well as the product mix, and we'll continue to review opportunities to put those door shops in new and more geographies.
Mike, do you want to take the second part of that with regard to veneer capacity?
Yeah, sure, Wayne. Yeah, George, I guess a couple of comments about the veneer side of things. It's our intention, and has been for a long time, to put as much of our internally generated veneer as possible into EWP. Except for the extraordinary case, we simply just make a lot more money out of EWP than we do out of plywood on an equivalent unit basis. We continue to look for, I would call them, innovative ways to get more of the veneer that we produce today into an EWP-type product, either the products that we make today or some other type of product that we may be able to make in the future. From that perspective, it's a metric that we measure every month, how much of our internally generated veneer goes into our EWP products.
We also have some very long-standing strategic partners that supply us veneer when needed. That's good for them, but it's also good for us because it's a sort of a win-win situation. As it relates to your question specifically around do we need more veneer production capacity, given the footprint we have today with our EWP facilities, I think it's unlikely that we would make an additional investment or take another foray into what I'd call extra veneer production capacity simply because we thought we might need it some years down the track. Wayne, do you want to add anything to that?
Yeah, I think the only comment I'd make is we are through some of our capital spending, like dryer projects at Chester, South Carolina, and we've got a modernization going on in the log utilization center at Florien, Louisiana. Those projects will result in a little bit more incremental production. More importantly, they really bring down the cost structure of the mills and improve our reliability. To Mike's standpoint, we'd rather flex to the peaks by buying outside veneer and try to make sure that the veneer that we need on a steady-state basis is produced at the lowest cost possible.
Makes sense. All right, guys. Thanks very much. Again, have a good quarter.
Thanks, George.
Thanks, George.
Thank you. I'm not showing any further questions at this time. I'd now like to turn the call back to your speakers for any further remarks.
Great. Thanks, everyone. We appreciate everyone joining us this morning for our update, and thank you for your continued interest and support in Boise Cascade. Please be safe and please be well. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.