Apr 24, 2015
Executives
Wayne Rancourt – Chief Financial Officer, Executive Vice President and Treasurer Tom Corrick – Chief Executive Officer and Chief Operating Officer Nick Stokes – Executive Vice President and Building Materials Distribution
Analysts
Alex Ovshey – Goldman Sachs Ketan Mamtora – BMO Capital Markets Chip Dillon – Vertical Research John Babcock – Bank of America Merrill Lynch Steve Chercover – DA Davidson
Operator
Good morning. My name is Kevin and I’ll be your conference facilitator today.
At this time, I like to welcome everyone to the Boise Cascade First Quarter 2015 Conference Call. Before we begin, I’ll remind you 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 reflects 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 Wayne Rancourt, Executive Vice President, CFO and Treasurer of Boise Cascade. Mr.
Rancourt, you may begin the conference.
Wayne Rancourt
Thank you, Kevin. Good morning, everyone.
I’d like to welcome you to Boise Cascade’s First Quarter 2015 Earnings Call and Business Update. Joining me today on the call are Tom Corrick, our CEO; Nick Stokes, Head of our Building Materials Distribution Operations and Dan Hutchinson from our Wood Products Operations and he is joining us by phone.
Moving to slide two, I would point out the information regarding our forward-looking statements. The appendix to the presentation includes reconciliations from our GAAP net income to EBITDA.
And with that, I’ll turn the call over to Tom Corrick.
Tom Corrick
Good morning. Thank you for joining us on our earnings call today.
I’m on slide three right now. The first quarter demand environment was modestly weaker than we expected.
However, builders and dealers remain optimistic in their outlook for 2015 and sales of new homes have strengthened substantially over the last six months. We still expect housing starts in 2015 to show full year improvement of about 10% from 2014, despite the slow start in the first quarter.
Our total company sales in the first quarter were up 6% with both segments reporting similar revenue increases. Our net income of $7.6 million was up 37% from the year ago quarter, driven by stronger results in wood products.
Plywood pricing was strong during the quarter in the phase of challenging markets for lumber and OSB. Plywood production was impacted in March to a small degree by the Chester, South Carolina dryer replacement project.
The new dryer is currently expected to come online during the first week of May, which is about a month behind the original schedule. In addition to plywood pricing, EWP pricing and volumes improved from the year ago quarter contributing to the earnings improvement.
Partially offsetting the positives in plywood and EWP, we did experience a quarter-over-quarter decline in our lumber pricing and an increase in log cost. BMD reported stronger revenues in the quarter, but weaker than expected commodity lumber pricing, which declined throughout the quarter, negatively impacted their gross margin percentage.
Operating cost also increased as a result of higher sales volumes. The $6.1 million of EBITDA reported for the quarter was modestly below our expectations back in mid-February.
We still remain optimistic that 2015 will show improvement in demand compared to prior year as we move into the second quarter. I’ll have Wayne cover the financial results in more detail and then I will come back with a few more comments on the outlook before we take your questions.
Wayne Rancourt
Thank you, Tom. Turning to slide four, Wood Products first quarter sales including sales to our Building Materials Distribution segment were $309 million, up 5% compared with last year’s first quarter.
The sales improvement was driven primarily by a plywood sales price increase of 6% as well as engineered product sales volume and price increases. Wood Products reported first quarter EBITDA of $31.7 million, up $8.7 million from the prior year quarter.
The improvement in EBITDA was due primarily to higher plywood and EWP sales prices, offset partially by lower lumber sales prices and higher log costs. BMD sales in the quarter were $623 million, up 6% from the year ago quarter.
Volumes were up 7% and pricing was down less than 1%. BMD generated EBITDA of $6.1 million during the quarter, which was down $2.1 million from the $8.2 million reported in first quarter 2014.
The first quarter of 2014 EBITDA number included $1.6 million of gains from selling surplus properties. In the first quarter, BMD generated $2.4 million more in gross profit dollars than in the year ago quarter as a result of the increased revenues.
However, that was more than offset by higher selling and distribution expenses which were up $2.5 million. We would expect BMD’s gross margin percentage to improve in the second quarter if commodity prices stabilize or increase.
Beginning this year, pension expense will be reported in our corporate segment instead of our business segments. We reported $2.1 million of pension expense in first quarter, which drove the negative variance in corporate cost.
For comparison, pension expense was only $278,000 in first quarter 2014, most of which we reported in the operating segments. Turning to slide five, our first quarter plywood sales volume in Wood Products were essentially flat with the same period a year ago.
Our $312 average net sales price for plywood was up 6% compared to first quarter 2014 and roughly inline with 2014’s full year average for plywood. Sequentially, plywood prices were down $18 or 5% from our fourth quarter average, which had the benefit of stronger October pricing.
Although second quarter plywood pricing started out roughly inline with the first quarter average, the continued pricing softness for other commodity building products is currently weighing on plywood pricing. It’s not clear at this point what direction plywood pricing will take in the second quarter.
Turning to slide six, our first quarter sales volumes for LVL and I-joists were up 7% and 2% respectively compared with the year ago quarter. Our LVL and I-joists sales price realizations improved 3% and 8% respectively from the year ago quarter.
Continued growth in housing demand and the resulting increase in sales volumes and pricing for EWP will be key drivers of our earnings growth going forward. Moving to slide seven, BMD’s first quarter sales were $623 million, up 6% compared with the year-ago quarter.
By product area, BMD’s sales of commodity products decreased 1%, general line products increased 16%, and EWP sales increased 13%. The gross margin percentage for BMD declined by 20 basis points compared with last year’s first quarter primarily as a result of lower gross margins on commodity lumber products.
On slide eight, we have set out the key elements of our working capital. Company net working capital, excluding tax items and accrued interest increased $46.6 million during the first quarter.
With higher sales receivables increased from year end. Our inventory growth was supported by higher accounts payable.
We did also payout accrued incentive compensation and customer rebates in the first quarter which drove the decline in accrued liabilities. As a reminder, the statistical information filed as Exhibit 99.2 to our 8-K has receivables, inventory and accounts payable data broken down by segment for those interested in more detail.
Moving on to slide nine, we used $29 million of cash in the first quarter and ended the quarter with total available liquidity of $476.5 million. For those modeling cash flow, we made $12.9 million in pension contributions in the first quarter.
Our effective tax rate was 37.5% and at this point, I would expect our book tax rate for 2015 to range between 36% and 38%. Following our last Board meeting, we increased our guidance for 2015 capital spending to $85 million to $95 million for the full year.
The Board also authorized an open-ended share repurchase program for up to 2 million shares. Tom will now touch on capital allocation in his closing remarks.
Tom Corrick
Thank you, Wayne. The consensus estimates for 2015 housing starts in the U.S.
have been declining as economists gauge the impact of the first quarter weather and the outlook for the economy. Current consensus is 1.14 million starts in 2015, which is inline with our original planning level of 1.1 million starts.
We continue to believe the demographics in the U.S. will support a return to a normalized housing start level of 1.4 million to 1.5 million starts.
With that in mind and based on our assessment of future demand and cash flow needs within our businesses, we requested and received Board approval to accelerate a number of high return internal capital projects to support future earnings growth in our wood product segment. The planned $30 million increase in capital spending in 2015 above what we spent in 2014, reflects the start of those projects.
The largest capital project being undertaken will modernize our Florien, Louisiana, plywood mill. We are replacing two older dryers with a new, larger, and more efficient single dryer that is expected to come online in early third quarter 2016.
The Florien expansion project will also include improvements beginning in the wood yard and flowing throughout the mill to the shipping area. We expect the project to provide us with additional low-cost, internally generated veneer to support our growth in EWP in 2016 and beyond.
In BMD, most of the incremental capital deployment is expected to be into working capital as we expect volumes to grow seasonally and as housing improves. We will also continue to review opportunities in our distribution footprint.
Our priorities remain to focus on operational excellence, while pursuing organic and strategic growth. We want to grow organically and pursue acquisitions that we believe will provide a favorable return to our investors.
We said in our last call that if we generated cash beyond what we expect to be able to reinvest in growing the business constructively, we would look at share repurchases or dividends. I am pleased that we now have a 2 million share repurchase authorization in place to provide us with additional capital allocation flexibility.
In closing, we are optimistic about the balance of 2015 and are looking forward to growing our company and earnings as housing continues its gradual recovery. Thank you again for joining us on our call this morning.
We would welcome any questions at this time. Operator, would you please open the phone lines.
Operator
[Operator Instructions] Our first question comes from Alex Ovshey with Goldman Sachs.
Tom Corrick
Good morning, Alex.
Alex Ovshey
Great. Thank you.
Good morning, Tom, Good morning, Wayne. Couple of ones for you, so not too long ago, we had the announced combination of a couple of big players in distribution channel.
Wanted to get your thoughts on implications for your business. And then as a follow-on to that, where you guys stand in terms of growing your distribution business and the appetite to do it inorganically via M&A?
Tom Corrick
Alex I’ll ask Nick to answer the first part of the question and I’ll take on the second part.
Alex Ovshey
Perfect.
Nick Stokes
Certainly, Builders FirstSource and ProBuild today are significant customers of ours. We look forward to working with them through their integration and our confidence that the new company will be a significant customer of ours going forward.
I would remind everybody that BMD is one of just a handful, if not the premier national distributor and as the national footprint of those combined entities comes together. I think we’re in a unique position to offer those products and services that create really value for them.
Alex Ovshey
Make sense Nick. Thanks.
Tom Corrick
Relative to acquisition opportunities for distribution, I think our focus primarily right now, Alex, is trying to identify opportunities to fill in holes in our geographic layout of our yards. You know in general, where you are in the distribution business, where you are purchasing facilities in a town where you already have a presence, in an MSA where you already have a presence, it’s very difficult to obtain synergies in that transaction as suppliers to the distribution yards typically want at least two distributors in the marketplace and customers tend to want at least two distributors.
So there tends to be a difficult time obtaining real synergies when you are marrying two facilities together in a single geography.
Alex Ovshey
Got it, Tom, okay. And maybe a question on the organic investments you are making.
So let’s fast forward through to five years and assume we can get back to normal housing environment, can you talk about what your plywood manufacturing footprint looks like? Do you think you could still be able to produce the same amount of plywood three to five years from now as you are doing today, with the investments that you are putting in to the mills right now?
Tom Corrick
Obviously there is a lot of factors that would go into that, but the intention of our capital program going forward is to be able to maintain our level of plywood production and to be able to maintain our market share and EWP as housing returns to 1.5 million starts.
Alex Ovshey
That’s the goal, okay. That’s clear.
And then just last one for you on EWP. So over the last couple of years, it looks like the volume numbers that you guys have reported have become embedded on single-family starts which I think is the most important driver and I don’t know if that’s an industry wide phenomenon?
Where the entire industry is doing better or just you guys are doing better than single-family? So the question really is do you think that trend continues that the EWP volumes, specifically LVL can continue to outperform single family start to some extent?
Tom Corrick
Well, you know there is still, particularly on the beam side of the business, there is still I think substitution going on for two-by-tens. So there is increased penetration for the product line into new residential construction.
So I think there will be continued trend, probably not as aggressive as we’ve seen in the past as the product matures. But I think we’ll continue to see some growth above and beyond housing starts.
Alex Ovshey
Excellent Tom. Great.
Thank you very much. Will turn over.
Tom Corrick
Thanks Alex.
Alex Ovshey
Thanks Wayne.
Operator
And next question comes from Ketan Mamtora with BMO Capital Markets.
Tom Corrick
Good morning, Ketan.
Ketan Mamtora
I just wanted to talk a little bit about log cost. Can you talk about any benefit that you might be seeing on the West Coast and then what you are seeing in U.S.
South?
Tom Corrick
Yeah, I think on the West Coast, it became more pronounced in last 60 days in terms of the declines in log cost and one of the things I’d remind you is that we do maintain log inventories at our mill sites and we do have committed logs that we purchased that we refer to as timber under contract that we’ll harvest generally over the next 18 months to 24 months. So, we don’t have the volatility you would normally see in the spot market flowing through our P&L in any given quarter, but we had very modest, less than 5% increases on our wood cost year-over-year on the West Coast and we actually saw modest declines in wood costs in the South.
Ketan Mamtora
Okay, that’s interesting. I would have thought it to be the other way.
Tom Corrick
Well, again it’s not totally reflective of what’s going on in the spot market because of contracted wood we have and what we have in inventory.
Ketan Mamtora
Got you. That’s helpful.
And then second question on plywood, obviously plywood prices have continued to remain quite strong. Are you guys seeing any supply moves in plywood at this time?
Tom Corrick
Well, there are a few things going on, Ketan, Georgia-Pacific announced last year that they were evaluating bringing on one of their idled plywood facilities, which at this point I think they contemplated. They’d make an announcement sometime late this year.
I haven’t heard anything since then. Wood Resources is rebuilding and restarting a plant in Mississippi.
And Swanson had a small plan in Western Oregon burned down last year that they’ve announced they intend to rebuild. That plant frankly operates in a segment of the plywood business that’s very specialized that I don’t think will have much impact on us.
That’s what we know about on the supply side. I think it’s important to note on the demand side that there are some pretty significant drivers of growth.
First, plywood is very much tied to the general economy. About 80% of the production goes into a variety of things other than new residential construction and we would expect demand for that to grow inline with the economy.
There is another significant, still 20% roughly, of new res is done with plywood. So if we see a 10% increase in housing starts that we forecast this year, we’d also see a corresponding increase in the use of plywood in new res.
And the final component is as new res takes off, we need to divert veneer away from plywood to EWP. And the three factors together, if you saw 10% increases in housing starts this year and next year would more than use the incremental production that would be potentially represented by those three facilities.
That’s what we know about on the supply side. I think it’s important to note on the demand side that there are some pretty significant drivers of growth.
First, plywood has very much tight to the general economy about 80% of the production goes into a variety of things other than new residential construction and we would expect demand for that to grow on line with the economy. There is another significant still 20% roughly of new res is done with plywood, so if we hit 10% increase in housing starts to report cash this year we’d also see a corresponding increase in the use of plywood in new res.
And the final component is as new res takes off, we need to divert winter away from plywood to EWP. And the three factors together, if you saw 10% increases in housing starts this year and next year would more than use the incremental production that would be potentially represented by those three facilities.
Ketan Mamtora
Okay. That’s helpful and then one last question.
Wood product pricing generally apart from plywood have actually continued to fall through the quarter, which is very surprising and unusual for this time of the year, what is your read of the situation?
Tom Corrick
I think there is a lot of factors that play here. I think currency is having an impact both in terms of what’s leaving North America and to a lesser degree what’s flowing into North America.
I think you do have – or some things going on in the tax front that probably accelerated shipments of lumber in the first quarter from Canada into United States and the import tax. There is a variety of factors and it doesn’t take much of an oversupply to cause pressure on pricing.
Ketan Mamtora
Okay. That’s very helpful.
I’ll turn it over.
Tom Corrick
Thanks Ketan.
Operator
Next question comes from Chip Dillon with Vertical Research.
Tom Corrick
Good morning, Chip.
Chip Dillon
Hi. Good morning.
First question is just a housekeeping thing. Could you let us know what your lumber realizations were in the fourth quarter as well as the first quarter?
Tom Corrick
Sure. Lumber was 5.10% first quarter.
And in the fourth quarter it was 5.44%. And a reminder, we tend to be focused ponderosa pine that goes to industrial convertors.
Chip Dillon
Got you. Okay, that’s helpful.
And then when you look at the plywood pricing, you mentioned it’s up. I do see it certainly was up year-over-year but it was down from the fourth quarter and I didn’t know if there is a mix issue or a seasonality factor that we need to keep in mind.
Wayne Rancourt
Frankly, we were surprised. That $330 we saw in the fourth quarter is very atypical seasonally to have only a $5 drop from third to fourth quarter was unusual.
So the $312 that we got in first quarter seasonally is actually a pretty good number to be starting the year.
Chip Dillon
Yeah.
Tom Corrick
And Chip, the other thing I would add there is if you went back and really deconstructed the number in the fourth quarter, a very, very strong October with falling prices for the rest of the year in plywood, we actually in general, kind of where we went into the quarter, the first quarter is where we came out.
Wayne Rancourt
And the other thing is just as you would expect the volumes were higher on October than they would have been in November, December because of the holidays. So as Tom points out the fourth quarter average benefited from October both from a volume and a price level.
Chip Dillon
I see, okay. And then another question on the distribution side, as you look out over the last couple years since the IPO and before and coming out of the crisis, how has the, either the availability or not of attractive distribution acquisition, potential acquisitions changed.
I mean, are there more that are available? Are there fewer?
Are there a lot available? Were they are asking too much?
And I guess, as a related question, maybe it doesn’t makes sense to buy someone else, maybe you grow organically with the market in a given market, but could you just address those issues?
Wayne Rancourt
Yeah. I think if you think about our distribution footprint and if you were to pull out a map, we don’t have very many MSA’s if any that are of significance that we don’t reach today either directly like in a case of Dallas and Houston or through long truck hauls into West Texas.
So as the volumes come back, we will look for opportunities using West Texas as an example and try to acquire in that market or consider organic growth and put sales people, put product on the ground and once we reach critical mass, open a facility and you saw us just do that late last year in Kansas City and we’ve got a couple of other adjacent markets we’ll look at. And clearly the preference would be to buy if we can find the right acquisition opportunity.
But we’re fully prepared to go in when the volumes make it make sense and we can get a good economic return for investors. And as Tom Corrick alluded to, being the largest wholesale national distributor and having the footprint in place today and having the leading position with a number of our key branded suppliers, if we acquired somebody and they were the second distributor for that supplier, the supplier would open up a third distributor if we buy their other distributor.
And we have the same issue for the customer side, we’re a very big supplier today the ProBuild, 84 Lumber, BMC Stock, Builders FirstSource et cetera and over half of our business is with local independents. And if we bought a significant distributor in an MSA where we already have a presence, they will likely open up a second distributor if we were to consolidate an MSA where the two of us had considerable market share.
So, when we look at the synergy opportunity in the distribution business, it’s probably more likely in an adjacent distribution space or single market activity. I don’t think you’ll likely see us do a large U.S.
distributor. We could obviously do distribution outside of the U.S.
and there would be some limited synergies there. But given our large market presence today it’s more difficult to contemplate doing that and in our current distribution arena.
Chip Dillon
It just seems like and we don’t get nearly the insights you all have, because a lot of – at least the numbers I see from people like BlueLinx and others who seem to not be generating lot of cash and profitability and others that have some market growth, say, physical volumes come back, you have pricing coming back that some of these other players were being able to grow with the market, assuming they can’t get their hands on working capital, but it seems like you are sensing there are others that could handle that?
Wayne Rancourt
Yeah. I mean, as you noted in this business, and Tom Corrick alluded too in his comments, the biggest thing we think that will be an impediment for competitors growing as the market recovers is access to working capital because if you are in a relatively thin margin business, trying to generate sufficient cash flow to cover the working capital needs can be a problem.
So that’s one of the things we benefited from during the downturn as we maintained a very strong balance sheet and we were able to grow and take share and we would expect to continue to do that throughout 2015, 2016 and beyond as housing recovers.
Tom Corrick
There are many solid strong performing regional and local wholesale buildings product distributors that I think are perfectly capable of stepping into that position.
Chip Dillon
I see. Okay, that’s very helpful.
And then just lastly, getting back to the plywood versus OSB situation, is it your opinion that basically the plywood market pretty much is involved in areas where OSB just doesn’t make a viable substitution at any price or have you seen any signs that OSB quality has come up to a point where they can start to nip at your heels a little bit?
Tom Corrick
Well, I think it’s fair to say that the two products in many, many applications are functional equivalents. There are some packaging applications where that’s probably not true, I think a lot of it’s a preference issue and you know we always say if you want to figure out how people buy and how people use plywood, go into a Home Depot on a Saturday morning.
If they’re buying one sheet, they buy a sheet of plywood because it looks like wood and if they are buying 20 sheets, they buy OSB because it’s cheap. To your question, I think if you look at the APA data, it would show that we saw a slight decline in plywood shipments in the prior quarter and an increase in OSB shipments.
So with the big price gap we see in places where they are functionally equivalent, you’re seeing I think not significant, but gradually continued substitution and I would guess primarily in the new res arena.
Chip Dillon
I see, very helpful. Thank you.
Operator
[Operator Instructions] Our next question comes from George Staphos of Bank of America Merrill Lynch.
Tom Corrick
Good morning, George.
Wayne Rancourt
Hi, George.
John Babcock
Hey, this is actually John Babcock sitting for George. Just wanted to kind of get through a couple of things, I mean, you touched a little bit about, kind of your outlook on EWP, but I was wondering, first of all, have there been any pricing increases announced in the marketplace at this point in time for the product?
Tom Corrick
There has been an increase in Canada. There is nothing in the United States.
John Babcock
How large was that increase in Canada?
Tom Corrick
I am sorry.
John Babcock
No, I was just wondering if you could give us a sense for the size of that increase. Was it inline more or less with the one that was announced last June?
Tom Corrick
Yeah, it’s probably in the 5% range.
John Babcock
Okay, sounds good. And then I was also, on the lumber front, clearly we did see a pretty significant decline in commodity prices in the first quarter.
Could you just provide a little bit more detail there as far as ultimately what caused that decline, whether it was weather or market conditions? And then also any color you could provide on your sense as far as the health of the housing market would be great.
Tom Corrick
Yeah. On the lumber piece, I think that lot of the information is anecdotal, but I think with many of the challenges that the inland producers are experiencing with the mentioned pricing right now, they have diverted some of their production towards ponderosa pine because it represents better economic return and that increase in supply has obviously impacted price.
What was the second question again?
Wayne Rancourt
Hang on a second, John is your question more around dimension lumber and how it impacted BMD as opposed to our ponderosa pine shop lumber?
John Babcock
No, I mean – yeah I mean I was more concerned about the product that BMD is selling. I just want to understand what your thoughts are as far as what’s causing that price decline and just to kind of give us a sense as far as where those prices could go from here?
Wayne Rancourt
Yeah, I would tell you we’re not a major lumber producer, but as a buyer there is probably three or four factors that are influencing and I mean everybody knows about when or whether they’d hit the Northeast. I think people are kind of less focused on the amount of wet weather that hit the South and the Southeast that disrupted people getting to jobsites.
Obviously you got weakness in the Canadian dollar and with China slowing down you had fewer exports to China. As Tom mentioned, there is an incentive to get and stop export ahead of that soft wood lumber agreement terrors kicking-in in April.
And then frankly, as you have falling prices buyers step away from the market, because they see the prices coming down and they know if they wait, they’re likely to get a lower price, which pulls at least temporarily some demand out of the marketplace and it starts to feed on it selves. So I think now that you are starting to see hopefully lumber prices stabilize, some of that will reversed, but there wasn’t a lot of incentive, A because of the weather and B because of the direction of prices, there wasn’t a lot of incentives to put wood on the ground for buyers, because they had ready availability and prices were continuing to decline.
And we would expect that to reverse now that we are getting into the spring building season.
John Babcock
Okay. And where there any inventory charges in the first quarter because of the price declines in BMD?
Nick Stokes
This is Nick, John. Very modest and immaterial.
John Babcock
Okay. And also I was just wondering – I guess given the fact that there weren’t any significant inventory charges.
I guess I would have expected something a little bit bigger just given the size of those declines. Did you guys have something that offset that?
Wayne Rancourt
Well, if you think about the distribution business, as you know, the impact to our margins is driven by the magnitude and the duration of change as opposed to the absolute levels. And you look across the distribution product mix in the wood products arena, you’ve got products like dimension lumber and studs that fell dramatically.
You’ve got plywood that didn’t fall as dramatically. You’ve got OSB that fell pretty dramatically.
You’ve got pine boards and cedar and redwood and other products that mitigated all that to some degree. So it’s a mix issue a bit.
John Babcock
Okay. I got you.
Thanks for that. And then just lastly ultimately I was wondering if you could talk about the inventory levels at distributors out there.
Wayne Rancourt
Yeah. I don’t think we see anything unusual in the distributor inventory levels.
Again, I think just buying behavior. No one has felt a need to put wood on the ground, just given the pricing environment and the demand environment and all that mix, I’ll let Nick speak to this, but I think in the last week the daily sales on our distribution business have picked up noticeably and so as we move into the second part of April and into May, just with the weather improving things drying out in the South and Southeast, we would expect the volumes to start to pick up meaningfully.
Tom Corrick
Yeah, I would describe inventories in the channel as sufficient. I think everybody kind of has what they need at the moment.
And to Wayne’s point, if demand ramps up now, that the seasonality starts to pick up, we’ve seen glimmers of that in the last 15 days and would expect that to the assumptions that we all have about housing for the balance of the year pretty nice increase in primary demand.
Wayne Rancourt
The question was asked and I think we failed to answer it about what our outlook was on housing and in terms of what we are hearing from out customers and our customer’s customers, the builder. Really the news I think is pretty good.
We’re seeing positive trends. I think everybody here saw the announcement on existing home sales yesterday.
Some encouraging data on there on first time buyers which I think has been one of the pull backs in the marketplace. New home sales have shown very healthy growth trends from last summer to this winter.
Certainly as the big home builders are reporting first quarter results, the comments they are making are encouraging. I think as much as anything I think and it’s a pretty common theme across the board.
There are some fairly significant restrictions on ramp up and particularly focused around labor and transportation. And so I don’t see it turning into a huge increase, but I think there is very good trends out there in terms of what’s going on in the housing market that makes me comfortable with our forecast for 2015.
John Babcock
Got it. All right.
Thanks for all the color.
Wayne Rancourt
Thanks, John.
Operator
Our next question comes from Steve Chercover with DA Davidson.
Tom Corrick
Good morning Steve.
Steve Chercover
Good morning, Tom. Hi, Wayne.
I wanted to follow along that theme. I mean I too think 1.1 million is still attainable, but we seem to get mixed signals.
I mean yesterday’s existing home sales were great, this morning the new residential was down 11%. And so are there any trends that you can discern with respect to taste?
I mean are people more into having a close in old home as oppose to a new home or what’s going on?
Tom Corrick
Steve, that’s a tough question. I think there are a lot of things going on and I read a lot of opinions about availability of credit and credit where student loans and you can list a thousand anecdotal things that go on that are out there as explanations.
I think that the controller on all this at the end of the day is going to be demographics and the demographics still remain, I think, very positive. But there are a lot of pressures in the economy.
Employment being a big one that are making this a gradual process. This has hardly been the type of recovery that the prior recoveries have been that have been associated with really strong recoveries in housing.
Steve Chercover
But it does seem that whether it’s a new home or an existing home, the inventories are fairly tight. So sooner or later we ought to see tension, do you agree with that?
Tom Corrick
That’s how it feels to us, yes.
Steve Chercover
Yeah it s certainly how it seems here at least in Oregon. And then switching gears a bit, I might have missed it, but the delayed dryer install on the East Coast, is that going to impact production at all in Q2?
Wayne Rancourt
It will, Steve, but it won’t be different than the impact we saw in Q1.
Tom Corrick
It’s probably 1% to 1.5%. It’s not – you’ll lose it in the rounding.
Steve Chercover
I mean is that the kind of thing that you can basically offset with your objective of balancing supply and demand?
Wayne Rancourt
Well, the new dryer will have more capacity than the old dryer did. I think, honestly Steve I don’t think you need to worry about it from a modeling perspective.
Steve Chercover
Okay. And the facilities that you might operates below capacity, I mean are you referring to EWP were that’s already the case or are you thinking of flexibility on your plywood and lumber production?
Tom Corrick
Well, certainly there is lots of flexibility on lumber production. In general right now, just given demand and pricing in plywood, we’re running our dryers pretty much full on.
And at EWP, we clearly have lots of excess capacity in place and our focus is on growing sales and maintaining and increasing prices. So we’re going to be thoughtful about how we bring on incremental capacity.
We have lots of flexibility in both our EWP plants and that we can dealvia some fairly thoughtful manning strategies, run partial shifts without having to be two shifts or three shifts.
Steve Chercover
And what’s the current operating rate in EWP please?
Tom Corrick
I would guess about 70%.
Steve Chercover
70% got it. All right, I think that’s it from me.
Thank you.
Tom Corrick
Thanks Steve.
Operator
And I’m not showing any further questions at this time. I’d like to turn the conference back over to our host.
Wayne Rancourt
Okay. Thanks everyone for joining us.
We’ll look forward to talking with you next quarter.
Operator
Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.