Q2 2023 Boise Cascade Company Earnings Call
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Good morning, My name is Michelle and I will be your conference facilitator today at this time I would like to welcome everyone to Boise Cascades second quarter 2023 earnings 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 to ask a question during this session.
You'll need to press star one one on your telephone you will then hear an automated message advising you that your hand is raised.
Your question. Please press Star one again it is now my pleasure to introduce you to Kelly <unk> Senior Vice President CFO and Treasurer Boise Cascade. Mr. Hatch you may begin your conference.
Thank you Michele good morning, everyone I would like to welcome you to Boise Cascades second quarter 2023 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 strong head of our building materials distribution operations.
Turning to slide two.
This call will contain forward looking statements. Please review the warning statements in our press release on the presentation slides and in our filings with the SEC regarding the risks associated with these forward looking statements.
Please note that the appendix includes reconciliations from our GAAP net income to EBITDA and adjusted EBITDA.
Segment income to segment EBITDA I will now turn the call over to Nate.
Thanks, Kelly and good morning, everyone. Thank you for joining us for our earnings call today on slide number three.
Both of our businesses again delivered strong financial results as associates across the company continued to execute at a very high level and the market proved to be resilient. Despite ongoing economic uncertainties. Our consolidated second quarter sales of $1 8 billion were down 20% from second quarter 2022.
Net income was $146 3 million or $3 67 per share compared to net income of $218 1 million or $5 49 per share a year ago.
Third quarter total U S housing starts and single family housing starts declined 11, and 14% respectively compared to the prior year quarter.
Wood products reported segment EBITDA of $127 million in the second quarter compared to $167 $8 million a year ago quarter. The wood products team delivered very good financial results as uwp volumes rebounded sharply from first quarter levels.
Building materials distribution reported segment EBITDA of $105 9 million on sales of $1 6 billion for the second quarter compared to $161 million of segment EBITDA and sales of $2 1 billion.
The comparative prior year quarter substantially lower commodity product pricing negatively impacted.
Year over year revenue comparison, however, volume results competitive compared quite favorably to headline housing starts and gross profit and EBITDA margins were again strong Kelly will now walk through our financial results in more detail and provide an update on our capital allocation after which I'll provide our outlook before we take your questions.
Thank you Nate wood product sales in the second quarter, including sales to our distribution segment were $530 3 million compared to $536 million in second quarter 2022, as Nate mentioned wood products reported segment EBITDA of $127 million down from EBITDA of $167 8 million reported in.
The year ago quarter. The decrease in segment EBITDA was due primarily to lower plywood sales prices. This decrease was offset partially by higher plywood sales volumes higher AWP sales prices and lower.
Wood fiber costs.
BMD sales in the quarter were $1 6 billion down 23% from second quarter 2022 <unk>.
BMD reported segment EBITDA of $105 9 million in second quarter compared to segment EBITDA of $161 million in the prior year quarter. The decline in segment EBITDA was driven by gross margin decrease of $49 8 million, resulting from lower margins on AWP and general line products offset partially by margin improvements on.
<unk> products.
Turning to slide five our second quarter sales volumes for I joists were down 9%, while sales volumes for LVL were up 2% compared with second quarter 2022.
On a sequential basis volumes for I, joist, and LVL increased by 63% and 29%, respectively, driven primarily by an increase in new single family housing starts of 39%.
Sequential pricing for I, joist, and LVL was down 4% and 3% respectively.
Looking forward the third quarter, our order files in market activity are healthy and new single family starts will continue to be an important demand driver for AWP volumes on AWP pricing. We currently expect low single digit sequential price declines in the third quarter.
Turning to slide six our second quarter plywood sales volumes in wood products was 440 million feet compared to 281 million feet in second quarter 2022, plywood sales volumes increased during the quarter as we shifted a higher proportion of urban air into plywood production given the change in demand for AWP the ing.
Increase in plywood sales volumes was also partially attributed to the acquisition of coal supply within July of last year as well as downtime taken in 2022 to replace an existing driver at our Chester South Carolina plywood and veneer facility. So.
365 per thousand average plywood net sales price in second quarter was down 36% from second quarter, 2022, and down 1% sequentially. Thus far in the third quarter of 2023 plywood price realizations are flat compared to our second quarter average.
Moving to slide seven and eight BMD second quarter sales were $1 6 billion down 23% from second quarter 2022, driven by sales price and sales volume decreases of 22% and 1% respectively by.
Byproduct line commodity sales decreased 36% General line product sales decreased 8% and sales of AWP decreased 21%.
As previously mentioned gross margin dollars decreased by $49 8 million in second quarter compared to the same quarter last year, resulting from lower margins on AWP and general line products offset partially by margin improvements on commodity products.
However, <unk> gross margin percentage was 15%.
110 basis points from the 13, 9% reported in the second quarter 2022, the improvement on a margin percentage basis was driven by commodity products as commodity prices were generally stable during 2023 compared with a declining price environment during 2022.
Bmd's EBITDA margin was six 5% for the quarter down from the seven 6% reported in the year ago quarter, but up 90 basis points sequentially.
Looking forward BMD sales pace, thus far in third quarter 2023 remains strong with our daily average sales on pace with second quarter levels. The proportion of BMD sales that our warehouse versus direct the product mix between commodity general line in AWP, along with the trajectory of pricing across all.
Product lines will influence Bmd's results.
Said, we expect to report solid financial results again in the third quarter with EBITDA margins comparable to levels achieved thus far in 2023.
Moving to slides nine and 10.
These slides show the generally stable pricing environment for lumber and panel pricing during second quarter 2023, compared with notable noticeable decreases in the prior year quarter.
For further context year over year second quarter average composite lumber and panel prices have declined by 50% and 40% respectively. This sharp price deflation has had meaningful impacts on a portion of our sales related to commodity products. However, as we begin third quarter, both price composites have shown upward momentum.
Future price volatility is likely we will maintain our approach to having inventory on hand to support our customer base.
I'm now on slide 11.
We had capital expenditures of $68 million during the six months ended June 32023, with $19 million of spending in wood products and $49 million of spending in BMD and what products. We continue to progress with our multi year capacity expansion projects in the southeast U S and are on track to hit our target LVL billet capacity.
<unk> growth of 5% by this year end and BMD, our execution of organic growth continues including the recent startup of our Kansas City door shop, They expected completion and startup of our Marion, Ohio Greenfield expansion project by year end.
Not included in our 2023 capital spending range of $120 million to $140 million is a robust pipeline of additional projects in both businesses that we are work and expect and expect to announce in the coming quarters.
And what products. We have we are evaluating projects that would secure or further enhance our veneer based strategy and BMD. The pipeline includes spending to solidify and expand our presence in existing markets and further our organic growth strategy in door Assembly operations. In addition.
Our balance sheet allows us the ability to pursue growth via M&A, if appropriate opportunities arise that align with our strategy.
Speaking to shareholder returns, we paid $133 million in regular and special dividends to shareholders. During the six months ended June 32023.
And last week, our board of directors approved a quarterly dividend of <unk> 20 per share payable on September 15th to shareholders of record as of September one.
This represents represents a <unk> 10 per share or 33% increase in our quarterly dividend of.
Our balance sheet remains very strong and our balanced approach to capital allocation is unchanged. We will continue to invest in our existing asset base and organic growth projects pursue M&A that aligns with our strategy, we remain committed to our fixed dividend through the business cycle and Opportunistically return additional capital to shareholders.
We deem appropriate via special dividends or share repurchases I will turn it back over to Nate to discuss our business outlook.
Thanks, Kelly I am on slide number 12 housing starts in June 2023 were approximately $1 4 million on a seasonally adjusted annual rate basis as reported by the U S Census Bureau.
However, home affordability remains a challenge for consumers and the federal Reserve's ongoing actions in response to inflationary data and what impact these actions will have on.
Future mortgage rates and the broader economy will influence the near term demand environment.
Uncertainty in the outlook for the back half of 2023 as reflected in various industry forecasts for 2023 U S housing starts, which generally range from $1 3 million to $1 4 million units compared with actual housing starts of $155 million in 2022 as reported by the U S census bureaus.
Regarding home improvement spending industry forecast project continued moderation in year over year growth and renovation spending and economic uncertainty may also negatively impact homeowners further investment in the residences.
Despite these near term uncertainties, we believe the longer term demand drivers for new residential construction and repair and remodel activity continue to be favorable supported by strong demographic trends low on inventory and the age of U S housing stock as such we remain clearly focused on the execution of our strategies and have great conviction around our investments there.
So the company.
Lastly, I want to express my gratitude to our associates, whose consistent focus grit and hard work when coupled with our quality of our assets and the effectiveness of our business model or the constant driver behind our success I expect our team to again deliver solid financial results for the third quarter, despite the softer economic backdrop.
Thank you for joining us today for your continued support and interest in Boise Cascade, We will welcome any questions. At this time Michelle would you. Please open the phone lines.
Thank you again, if you have a question at this time. Please press star one on your telephone one moment, while we compile our Q&A roster.
Our first question is going to come from the line of Kurt Yinger with D. A Davidson. Your line is open. Please go ahead.
Great. Thanks, and good morning, everyone.
Hi, Chris.
Just wanted to start off on AWP.
Really nice bounce back in volumes like you alluded to as you look at the performance relative to kind of the past two quarters. I'm wondering if you have any thoughts around the impact of kind of underlying demand improvements versus maybe a bit of restocking and based on the order file at this stage. How are you thinking about Q3 volumes versus <unk>.
You too.
Good morning, Kurt Mike Thanks, very much for the question. So as we think about the coming quarter at this point in time.
We're envisioning a quarter pretty much like the last quarter al autopilot is quite strong.
And our inventories are in pretty good condition.
We are operating at maximum capacity, but at very high levels. So I think as we move through Q3, we should see a quarter pretty much like the last quarter.
Got it thanks for that Mike and and.
Just given some of the big swings in I Joist can you maybe talk about what you're seeing or hearing.
In terms of product substitution, whether it's solid sawn lumber our upland web trusses for <unk> applications.
Yes.
My comment would be basically the following so we've seen.
Obviously, a significant significant change by in both directions over time previously, let's say last year. When there was a lack of availability of I joists, because really we were on allocation there is substitution going on pretty much by any product.
Builders could get.
As we sort of move through the first half of this year.
I think you've seen some challenges with other products availability not the least of which is open web trusses and say because of the longer lead times, that's actually helped out.
<unk> business.
So.
Sort of a bit of a fluid situation, depending on demand and supply.
Hey, Curtis maybe just one other data point that is we have a chance to spend time with builders. They are focus on.
Cycle times.
It's very high and so as you think about what problems I Joyce in EWC solve on the job site. It takes it at speed and simplicity of the job site and helps reduce cycle time. So I think in terms of where the builders want to go where they need to go in terms of reducing cycle times I joist DWP are very much part of that answer and I think as Mike described it that we're seeing.
Some benefit of that as a result.
Got it okay that makes sense and then just lastly on BMD.
Jeff, hoping you could talk about what youre seeing in terms of customer appetite.
Replenish inventories across your different product categories, and whether there's anything from a competitive perspective that you think could not gross margins off the levels. We've seen here through the first half.
So.
I'd say overall.
As confidence grew and as we had a little bit of a commodity run in their inventory starting to build a little bit people start taking some small positions, but nothing like in the past and I would tell you that people are still really relying very heavily on how to warehouse shipments and that's the work we're going to continue to do so.
We're going to expect some seasonality this year, which we haven't seen a long time.
But overall I think we will ask me about a warehouse and people are not building inventories.
Got it okay. Thanks for that and good luck here in Q3 guys.
Thanks, Thanks Kurt.
Thank you and one moment for our next question.
Our next question is going to come from the line of Susan Mcclary with Goldman Sachs. Your line is open. Please go ahead.
Thank you good morning, everyone. Thanks for taking the questions.
Thank you.
My first question is.
You mentioned in your commentary that.
You are thinking about perhaps carrying a bit more inventory as you look to sort of support the service levels in the field.
How are you.
Manage our balance any sort of risk in this environment of carrying more volumes relative to wanting to be sure that you can support your your end market customers.
Yes, sure. It's Nate maybe just I think in terms of our commitment.
To our suppliers and our customers is to make sure we're in stock and have inventory to serve their needs. Both in terms of bolt as well as units job packs in pieces and as we look at kind of our inventory footprint and what's going to be required we work closely with our customers in terms of their expectations and what their needs are going to be as big.
What moves through the through the quarter through the year and work closely with our manufacturing and supplier partners as well to make sure. We have really good understanding of where they're at in their production plans as well as some of the things that they're trying to do in terms of introducing new products as well. So that's part of our thinking but ultimately what we said all along is that we want to put our balance.
She'd to work for the benefit of both our customers and suppliers and we're going to we'll be in stock.
To me that that's an important part of who we are and what's created I think success and confidence with our customer and supplier partners and that will remain certainly part of our game plan as we finish off 2023 and it ended in 2024.
Okay.
Helpful and I guess, when you think about the <unk>.
Restocking that is generally happening across building product categories through the spring into the early parts of the summer, which if theres any dispersion or differences as you think about products that might be earlier cycle. As you think about the macro and housing relative to later cycle in there and just any distinctions or.
Nuance is perhaps as you would call out in that.
Yes, sure its need again I would say.
There's going to be always some variability maybe by product and even by geography and part of that geography is how that geography serve if it's if it's truckload served a rail serve sometimes they will have.
Different element in terms of.
What that natural inventory needs to be.
I think at this point and as Jeff described it well I think we're seeing a more normal seasonality expectation as we go through the course of this year. So I don't think theres any.
CERN or anxiety by our customers they are simply going to be managing their working capital as they traditionally would manage their working capital and I think that's going to put more dependence on BMD in terms of those auto warehouse services, which we're excited to support so nothing too that would represent in terms of kind of early warning signs are things that we're looking at.
I think it's ultimately staying close to our customers and suppliers and then we will continue to work from there.
Okay, and then I just wanted to squeeze one more in as you think about your own working capital and the investments that youre, making in the business for this year.
Anything that you can help quantify there in terms of perhaps changes in the working capital or cash flow dynamics that we should be thinking about.
Hey, Tim This is Kelly so yes for sure we have made some purposeful announcements I mean think about Kansas City door shop, Houston door shop.
<unk> expanded some properties and be in DMD and a handful of geographies. So.
Probably nothing I would specifically call out other than to say certainly when you have a startup endorsed.
The door shop startup you're going to be pretty heavy on inventory you need to get that you need to get up and even get ramped.
But I would say really I think what we've seen over time in terms of how our how our inventory moves and how our receivables move certainly as we get into the seasonal seasonally weaker periods in the fourth quarter.
I don't see big and I don't see that we have made enough changes.
Really give you any different guidance than what we've typically done in terms of swings.
Okay, Alright, that's helpful. Kelly Thank you.
Sure.
Thank you and one moment for our next question.
Our next question is going to come from the line of George Staphos with Bank of America Securities. Your line is open. Please go ahead.
Thanks, So much hi, everybody good morning.
Thanks for the details and congratulations on the performance.
Hi.
You sort of modeling shorter term questions on a couple of longer term one.
First of all in terms of BMT margins, which once again were.
Certainly well ahead of our expectations.
Outlook for the year and being similar to the what you've seen in the first half of the year Kelly not trying to draw too fine a point on it but is that more reflection of what you've seen year to date or what we saw out of added <unk>.
Relatedly, what do you think recognizing a lot of it can be driven by demand in pricing in.
In the World. We're in right now is is the 6% six 5% margin normal.
For BMD.
Yes.
Take the first part of that question and then maybe I'll kick it to name two.
To build on my comments, so what we had in the in our speaking points. There George was really specific to the third quarter in terms of what our sales pace is so far through July .
And then just reminded folks in terms of kind of how the mix, whether that's mixed byproduct of our warehouse versus direct and those sorts of things that can move our margin profile.
But what we did guide there softly for the third quarter was that we gave you some guidance on sales pace in the third quarter so far.
And EBITDA margin.
Today, what we think.
We'd probably end up towards the top end of the range that we saw in the second quarter in terms of longer term.
Let me kick that question Tonight.
Hey, George Yes, maybe just on a longer term basis.
I think as Kelly described even in our comments I mean, there's lots of puts and takes in terms of kind of the here and now on what that looks like but to be clear obviously, we.
Our goal and commitment is how do we continue to grow that performance over time and I think we've been in terms of our investments in our facilities, how we expand our locations our products and services, where we've been able to add those including obviously expanding our door shops to meet you.
All consistent with again, how do we make sure we're continuing to kind of grow that earnings profile in BMD. So.
At any moment time, Theres again, as you know a lot of moving parts to that but in terms of kind of a trend and how we're thinking about it as a company in terms of the long term view.
We're investing in we feel really good about our ability to work to execute to that new standard higher standard.
Thanks, Matt one thing I wanted to ask on <unk>.
<unk> philosophy, and <unk> was it where you expected it to be in BMT or did it surprise to the upside and if so in particular, where.
Would there been any variances and if you had mentioned earlier in the call I apologize I was a little bit late joining because of another conference call.
Yes, no you find George I'll take that and then maybe see if.
Jeff has any extra color to add.
Thank you.
In our comments, we've all talked about the resiliency of the market being somewhat better than we would've expected in that and that did that did play out through the second quarter.
Sales activity did continue to ramp as we made our way through the second quarter.
Anything else you would add Jeff I would say on the general line fees, particularly our volumes were very good and very strong and have an inventory available and ready to go it really plays into our hands quite well for us.
Thanks for that Jeff two last one for me and I'll turn them over.
So one are you seeing or said differently.
Your distribution model and two step is there are there certain product categories that you think youre gaining share in.
Are there certain product categories that worked particularly well given the environment that we're in.
Through through BMD.
And then just a real quickie on AWP.
Again performance has been great and would not trying to pick at anything but the slight sequential drop in pricing I think you called out is that just a function of lagged changes or something else. Thanks, guys I'll turn it over.
Maybe I'll, let me start George on the kind of the question for BMD, and then ill hand, it over to Mike I would say.
In terms of kind of what BMD.
Risk profile relative to products and any kind of trends there we don't see it I think as our key suppliers. They continue to add new products and new services and so.
In many respects their skus get more complex.
And more abundant which is great.
But that puts more I think Burton and really frankly opportunity for us in BMD to serve our customers with a more complex product line in service. So to me when I look at some of our key partners.
That is part of their story I think they were a little bit hesitant over the last couple of years, George just given we were in a pandemic and their ability to introduce new products was not great, especially in environment, where things were sharp in terms of availability. So we expect that kind of trend to pick up.
New products, New services, and we think that again, it's incredibly supportive of BMD, maybe the other thing again before I turn it over to Mike is that customers continue to focus on their working capital and as they think about kind of the seasonality.
AMD is incredibly well positioned to serve and support our customers and suppliers as they kind of transition through the normal seasonality that we would expect as we move forward. So again, we feel really good about the franchise and how we're set up.
Are your suppliers asking you to take more volume than they were say.
Quarter, two quarters ago, just in general.
No. It's been kind of trying to I think they know okay. I think they are very well aware that we're going to buy to our sales pace.
Got it thank you Jeff I'm sorry.
Sure I'm, sorry, and then Mike on maybe the EWC question on pricing.
What we're seeing and expecting there yes sure. Yes go ahead George.
AWP pricing is that modest decline is probably best explained as follows.
The Boise Cascade value proposition for AWP includes a variety of different components field services outsourcing services, and our software and of course market competitive pricing there.
Others in this particular area of the players that don't necessarily bring all those components to the market and rely more on price and we've had two on occasions.
Address where we thought necessary some of the pricing that we saw in certain geographies.
Going forward, we're going to continue to do what we've been doing we're going to focus on our value proposition and if there are geographies, where we have prices that primary determinant and we will evaluate whether we need to do anything but you can see that there was a <unk>.
Quite modest decline and pricing will remain to be seen whether thats the case in the coming quarter.
Thank you Mike.
Thank you and one moment for our next question. Please.
Yes.
Okay.
In the EU.
Our next question is going to come from the line of Mike <unk> with <unk>. Your line is open. Please go ahead.
Okay.
Thanks Kelly.
Kelley, Mike and Jeff appreciate the time Tonight. Thanks, Congrats on a strong quarter.
Thanks, Mike.
Just one quick one from me to begin to start just can you comment I may have missed this as well because sterling a number of earnings calls today. So I do apologize for this but could you comment on your wood products order files.
Or do they stand today versus one Q John if you could also just comment on that.
Comment on maybe your operator.
In AWP and how that has changed in that.
Change in <unk> versus <unk> I heard the comment that you're still not running full but trying to get a sense of where you operate in DWP.
<unk> versus early in the year.
Yes, Mike.
Give you those numbers if you think about the second question first the operating rate.
Would say earlier in the year Q1 is sort of a general statement and it was a little bit different by geography side. This is sort of an overarching comment we were probably running around 60 odd percent. Okay. About capacity then you move into Q2 and particularly in the West there was a quite significant increase in demand while the south had been strong earlier in.
Year and continues to be quite strong.
<unk> right now I'd say, it's around 80 odd percent and Thats I think where it will probably stay for a while and you will have to see what happens with the demand situation. What have you as you move through this next quarter.
As it relates to order files.
Let's start with AWP, but also address plywood.
AWP order files were very strong to begin with in Q1 in the southeast and maybe not quite as strong in the west.
And then early in Q2, the west really starting to take off now with the changes in the climatic conditions in California in particular, so, but the west and the south was quite strong into Q2, and we have very strong order flow today.
Well I will say that the actions we took earlier in the year to make sure that we had enough people to run their operations as well as the $500 million that we spent last year to bring on additional veneer supply.
It's allowed us to take our order files and our lead times really quite short relative to other players in a particular space. So our order files are strong and lead times, while they are a little bit longer than the anomaly there.
Probably move up roughly a week or so compared to what I would call a normal lead time, that's on AWP as it relates to plywood.
Yes, we've produced more plywood as Kelly pointed out.
Moving a lot of plywood into the system and our order files is sort of <unk>.
Typical for this time of the year.
Several weeks in front of us for plywood and they continue to be sort of in that position.
Excellent Thats great. Thank you for the color there Mike just one quick follow up on that.
As for <unk>.
Our order files in AWP I know, we're only a month into the third quarter has there been any acceleration from <unk>.
Now I would say, yes, that's a real good question, Mike I think it sort of works like this way so theres still after one month of this particular quarter I'd say, we're still in the height of the building season.
We're going to go into August and September and I think Jeff mentioned earlier on the later, we get into the year.
Seasonality is that the kind of thing.
We believe our <unk> business. So at the moment I don't see a change it rarely much of a change in either direction, but I think we need to watch that as we sort of move through the quarter.
I would expect if things go back to normal whatever that is quickly mainstay.
By the end of the quarter, we will see some change to the normal downside, which is just the seasonality that happens towards the end of the third quarter inside of fourth quarter.
Got it very helpful. And then just one final question on wood products in General you guys from a cost perspective.
The job of closing high cost facilities streamlining the cost structure and what products.
Can you just comment on any other initiatives you're working on to further improve margins and should we expect that EBITDA.
Normalized EBITDA margin.
Could be 20% plus for that business on a go forward basis.
I'll have a crack at the first part and then I'll, let my capable CFO maybe address this.
So.
Yes, we're always working on it as you said, Mike and Kelly cognizant of alluded to this a little bit in his commentary.
We've been at.
I will say machine center replacement now for more than a decade. So we have a program of capital expenditures, where we're replacing old machine centers with new machining centers.
That assists us in both.
But.
Better costs overall in some cases, because they are just they are more efficient in terms of the output per unit time, and sometimes because there are less people involved in those machine centers and we also get an uptick sometimes in volume. So we have a plan moving forward to continue to replace old machine centers.
Instead of never ending in wood products, but I anticipate over the coming three four or five years, we will continue to invest in replacing old machine centers and that will give us hopefully a improvement in our cost structure as we move forward and Joe Kelley has some commentary on the second component the second component.
I mean, certainly you can see.
And you can hear what the strategy and the focus has been for a long time and wood products, which is really to grow DWP.
And as we've spoken before the constraint was veneer historically and we've.
Cleared that constraint with the acquisitions, we did last year and so we can continue to execute upon our strategy.
WP higher margin more stably priced product and that fits right into our strategy and so our yes. Our expectations are that we will continue to invest in our business and to Mike and to Mike's point continue to focus on cost and efficiency and we do want that trend to look better.
And the margin performance to be better than it was historically.
Thank you very much for all the color and good luck in the second half.
Thanks, Mike Thanks, Mike.
One moment for our next question.
Our next question comes from the line of <unk> <unk> with BMO. Your line is open. Please go ahead.
Thank you and good morning Kelly.
Maybe first question to start.
Great.
With AWP.
Any way to quantify the impact of higher OSB costs.
In Q3, so far then.
Uwp side of concern.
Yeah.
Yes so.
So as I think we've spoken to you before can we do the math.
Second as we have in terms of how we.
Our supplied OSB, it's kind of a rolling average.
Concept that we pay and so yes to the extent that OSB comes up.
You could probably use.
North central in terms of kind of as the index now are they OSB that we use for web stock is.
A pretty specific grade we have produce to meet the strength requirements, we have but you could use that as the trend in terms of.
Where where that price goes you can kind of use that as a metric what the cost, but the cost increase would be but again, there is going to be a lag.
Got you and Kelly typically what is a good proxy to think about that lag is it one month is it two months.
Yes.
Yes.
It's a quarter because we it is kind of that 13 week average concept that we have.
Got it.
Yes.
Got it.
And then Chris will do.
The capital allocation, obviously the balance sheet is in a very strong July putting a substantial net cash.
Curious as you navigate to an uncertain economic environment one.
How do you think about how much cash you should have on the balance sheet.
And then as you.
Can you talk about.
Deployment.
M&A historically yield question dividend.
Can you talk to kind of M&A pipeline.
I'll start off and our approach to share repurchases here.
Yes, so that's a big broad question around capital allocation, let me, let me try to hit it this way so.
You heard in my prepared remarks in terms of how we think about capital allocation and that has not changed in terms of how we think about it.
Your comments around having.
Our strong balance sheet.
That's true.
We're very happy to have that in the flexibility and the optionality that that gives us we did reference a robust a robust pipeline of capital projects ahead of us in both in both wood products and some of the things that Mike spoke about and then some additional opportunities in BMD.
<unk> opportunities, maybe some potential additional new markets for door shops, we have some lease facility to potentially weaken.
Hi out those leases we have a few things ahead of us that we might be looking at relocating and expanding our presence in existing markets. So all of that said, we do really have a pretty meaningful pipeline ahead of us here over the next several quarters and so.
As we kind of look from now until the end of the year.
There'll be a couple of things we think about when we have our next conversation with our board as we think about.
What additional returns to shareholders, we may want to consider.
In October or later in the year and the pace and the execution and our ability to.
Complete those organic growth projects that I spoke to as well as what the market conditions look like when do we get to that next conversation with our board in October all of those things will factor into.
What we want to consider as it relates to that next step if any on additional shareholder returns before we before we closed 2023.
Got it that's very helpful. I'll jump back in thank you good luck in the second half.
Thank you. Thank you.
Thank you and one moment for our next question.
Our next question is going to come from the line of Reuben Garner with the benchmark Company. Your line is open. Please go ahead.
Thank you and good morning, everybody and congrats on the strong quarter.
Thanks Reuben.
So.
First a follow up.
In earlier question on the BMD margin kind of longer term you guys know I like that question every quarter, but.
Looking for some maybe some clarity on a couple of things is there any way you could tell us what the mix of your kind of warehouse versus direct business is today versus maybe what it was.
In 2018 2019 or Pri.
Prior to Covid and is there any risk that like when things do officially normalizing your customers feel good again that you've got a margin kind of headwind even if even if demand is good because youre kind of going back to maybe a lower margin business.
Yes, good question and we'd be disappointed if you didn't ask that question Reuben.
So in terms of.
The mix between warehouse in direct I would say.
Traditionally when.
When there is confidence in the market and theres not concern around forward pricing and inventory risk I would say warehouse traditionally maybe is probably in the range of call it 65% or so of the mix, 65% to 70, and then whereas today we're <unk>.
Boy, we're probably more like in the 70% to 75% range and again Thats just comes back to that.
The laser focus downstream on working capital and concern around inventory risk and frankly, the ability that the availability of supply today people can get product and so they don't they don't feel the need to go long and they don't want to take the risks what's going along so that's how I'd frame it up in terms of the mix but.
You are exactly right that does.
We do have higher margins on warehouse and so if we do get shift back to two or to a market where there is a higher percentage of direct that would negatively impact our margin profile.
Maybe you could give the ribbon, it's Nate just to add as well.
Again as we had commented on earlier, if you think about.
Our suppliers and they're adding new products and services and that complexity. So that generally creates a maybe more of a auto warehouse opportunities as opposed to customers taking bulk quantities of some of those new products and services. So again, it's not a question of the customers not having the balance sheet to do it it's simply their their inventory footprint and really.
Having more reliance dependents on BMD, which is again exactly what we do so.
Again that new product and new services I think is going to be part of the equation going forward in the more complexity. The more additions. There then I think the dependence on BMD becomes.
More obvious as well.
Okay great.
The uncertainty about forward pricing.
<unk>.
Okay.
Is that in all product categories. I mean, we've kind of already seen is on the commodity front at least it appears that it's.
Bottomed out as the concern DWP is the concern general line products is it just everything.
Do you think the market or your customer base that there is price risk to the downside and I guess why why hasn't that been.
Reduced just given how.
Strong things have been to date even in the.
Quote unquote softer period.
I guess I'll start and then invite Jeff for Nate add color if they want to.
So.
If you break it into the three buckets commodity general underneath MVP so commodity.
Certainly it's round tripped and reverted not all the way back to maybe historical averages are but to your point there is less downside risk it would appear than what we've seen in recent recent quarters and recent last couple of years.
And Edp, we are as we've alluded to we are continuing to experience some level of price erosion.
Competitive marketplace and so we're responding where we think is appropriate.
General and pricing.
Yes.
Generally held up.
But I would say there are some categories like doors for example, thats come off some and there are there are deflationary risks certainly for in the general line product category, and I think jeff's going to add a little more color here, Hey, Reuben on the general line. It really fueled solid right now except in a couple of areas and those areas. If you look at what scrap.
Metal is doing if you look at futures of metal.
That would be the one area that is of concern and then I'll tell you that anything that really gets imported into container just because of the massive decrease in ocean freight that we've experienced if you have something on the ground and you have replacement gum and youre trying to move that off pretty quickly. So those will be the big areas of concern.
Got it thanks, guys. Congrats again on the results and good luck on business of the year.
Thanks Sharon.
Thank you and one moment for our next question.
And our next question is a follow up question from Susan Mcclary with Goldman Sachs. Your line is open. Please go ahead.
Thanks for fitting me in again.
Two things that I wanted to follow up on the first is that in response to one of the previous questions I think Mike.
And that yes, there is the potential for some seasonality as you think about the back half and as we get into the fourth quarter, but I guess when you when you consider what's going on on the ground in the bill.
<unk> committed to putting starts out through the third quarter Youre looking to have that inventory on hand, as we go into the 2020 for selling season.
Potential you think that we actually saw the skirt some of that seasonality or see a more muted sort of response to it as you think about the end of the year and maybe even going into the early parts of next year.
Yes. Good question. So this is Kelly.
Okay.
Your point.
<unk>.
Some of our message we could be we could be somewhat conservative compared to what some others think I guess, we will we'll see how this plays out for the balance of the year.
All of this can be very hot as we know and that can impact job sites and then we'll see what the winter brings in the fourth quarter. So I think you got that normal industry stuff and then we will see how the macro environment plays out around monetary policy.
Okay, well I'll add one thing to that that we're hearing loud and clear from some dealers. There was a really really late start in certain markets. This year due to weather and in those markets. They are a little bit more confident about what could be going on fourth quarter.
Yes, and it also sounds like there could be some incremental delays too just because of the intensity that we've seen in some markets as well so.
Feels like that weather is a factor all around.
And my other question is thinking about pilot capacity and when you think about the demand that's coming through on AWP and your need for veneer. How are you thinking about the capacity in plywood and sort of balancing these things out.
So the way we look at it.
Who is because.
Because we run this integrated model, which is a little bit different to some others.
Yes.
In the perfect situation, we would be able to have all our stretch rated veneer. So thats of any of that goes into AWP being used in AWP because of the demand profile in that particular product growth.
It's really not the case just at the moment.
So if AWP demand continues to be strong with picks up in.
In theory advertise we would have less plywood production because some of the veneer that might go into VW excuse me into plywood Tonight would be.
We'd be redirected into AWP, So I think Kelly mentioned earlier on.
Our focus is.
Looking to put the <unk>.
EMEA into its highest and best use.
So as we move forward, obviously clearly compared to a couple of years ago, we will have.
We'll have.
More total plywood production simply because of the acquisition.
The other the other item you might like to think about is.
If you look at the imports of Brazilian plywood side this year compared to the same time last year, they're down quite dramatically.
And so the overall situation is that it.
My math is approximately correct, we have the equivalent of about.
300 million feet less plywood coming in from Brazil last quarter compared to the same quarter last year. So that's a good thing from the plywood perspective because.
It doesn't have to go somewhere and that supports the.
The local plywood market, so plywood could be a little bit stronger going forward than maybe historically because of that if nothing else.
Yeah, Okay. Thanks for the color and good luck with everything.
Thanks, Dave.
And I'm showing no further questions at this time I would like to turn the conference back over to Nate Jorgensen for any further remarks.
Thanks, Michele we appreciate everyone joining us this morning for our update and thank you for your continued interest and support of Boise Cascade, Please be safe and be well. Thank you.
This concludes your conference today. Thank you for participating you may now disconnect.
Okay.
Okay.
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