Q2 2023 Boise Cascade Co Earnings Call
Participants
Dean Michael Brown; EVP of Wood Products; Boise Cascade Company
Jeffrey Robert Strom; EVP of Building Materials Distribution; Boise Cascade Company
Kelly E. Hibbs; Senior VP, CFO, Principal Financial & Accounting Officer and Treasurer; Boise Cascade Company
Nathan R. Jorgensen; CEO & Director; Boise Cascade Company
George Leon Staphos; MD and Co-Sector Head in Equity Research; BofA Securities, Research Division
Ketan Mamtora; Building Products Analyst; BMO Capital Markets Equity Research
Kurt Willem Yinger; VP & Research Analyst; D.A. Davidson & Co., Research Division
Michael Andrew Roxland; Research Analyst; Truist Securities, Inc., Research Division
Reuben Garner; Senior Equity Research Analyst; The Benchmark Company, LLC, Research Division
Susan Marie Maklari; Analyst; Goldman Sachs Group, Inc., Research Division
Presentation
Operator
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 Cascade's Second Quarter 2023 Earnings Conference Call. (Operator Instructions)
It is now my pleasure to introduce you to Kelly Hibbs, Senior Vice President, CFO and Treasurer, Boise Cascade. Mr. Hibbs, you may begin your conference.
Kelly E. Hibbs
Thank you, Michelle. Good morning, everyone. I would like to welcome you to Boise Cascade's 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 Strom, Head of our Building Materials Distribution operations.
Turning to Slide 2. 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. Also, please note that the appendix includes reconciliations from our GAAP net income to EBITDA and adjusted EBITDA and segment income to segment EBITDA.
I will now turn the call over to Nate.
Nathan R. Jorgensen
Thanks, Kelly. Good morning, everyone. Thank you for joining us for our earnings call today.
On Slide #3. Both of our businesses again delivered strong financial results as associates across the company continue to look 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. Our net income was $146.3 million or $3.67 per share compared to net income of $218.1 million or $5.49 per share in the year ago 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 in the year ago quarter. The Wood Products team delivered very good financial results as EWP 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 compared to the prior year quarter. Substantially lower commodity product pricing negatively impacted BMD's year-over-year revenue comparison. However, BMD's volume results compared quite favorably to headline housing starts and gross profit 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. Kelly?
Kelly E. Hibbs
Thank you, Nate. Wood Products 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 EWP sales prices and lower wood fiber costs.
BMD sales in the quarter were $1.6 billion, down 23% from second quarter 2022. 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 a gross margin decrease of $49.8 million, resulting from lower margins on EWP and general line products, offset partially by margin improvements on commodity products.
Turning to Slide 5. 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-joists and LVL was down 4% and 3%, respectively. Looking forward to third quarter, our order files and market activity are healthy. And new single-family starts will continue to be an important demand driver for EWP volumes. On EWP pricing, we currently expect low single-digit sequential price declines in the third quarter.
Turning to Slide 6. 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 our veneer into plywood production given the change in demand for EWP. The increase in plywood sales volumes was also partially attributed to the acquisition of Coastal Plywood in July of last year as well as downtime taken in 2022 to replace an existing dryer at our Chester, South Carolina plywood and veneer facility. The $365 per 1000 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 7 and 8. 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 product line, commodity sales decreased 36%, general line product sales decreased 8%, and sales of EWP decreased 21%. As previously mentioned, gross margin dollars decreased by $49.8 million in second quarter compared with the same quarter last year, resulting from lower margins on EWP and general line products, offset partially by margin improvements on commodity products.
However, BMD's gross margin percentage was 15%, up 110 basis points from the 13.9% reported in 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 6.5% for the quarter, down from the 7.6% reported in the year ago quarter, but up 90 basis points sequentially.
Looking forward, BMD's 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 are warehouse versus direct, the product mix between commodity, general line and EWP along with the trajectory of pricing across all product lines will influence BMD's results. That 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 9 and 10. These slides show the generally stable pricing environment for lumber and panel pricing during second quarter 2023 compared with 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 the portion of our sales related to commodity products. However, as we begin third quarter, both price composites have shown upward momentum, while 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 6 months ended June 30, 2023, with $19 million of spending in Wood Products and $49 million of spending in BMD. In Wood Products, we continue to progress with our multiyear capacity expansion projects in the Southeast U.S. and are on track to hit our target LVL billet capacity growth of 5% by this year-end. In BMD, our execution of organic growth continues, including the recent start-up of our Kansas City door shop and expected completion and start-up 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 working and expect to announce in the coming quarters. In Wood Products, we are evaluating projects that would secure or further enhance our veneer-based strategy. In BMD, the pipeline includes spending to solidify and/or 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 6 months ended June 30, 2023. And last week, our Board of Directors approved a quarterly dividend of $0.20 per share payable on September 15 to shareholders of record as of September 1. This represents a $0.05 per share or 33% increase in our quarterly dividend.
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, remain committed to our fixed dividend through the business cycle and opportunistically return additional capital to shareholders as we deem appropriate via special dividends or share repurchases.
I will turn it back over to Nate to discuss our business outlook.
Nathan R. Jorgensen
Thanks, Kelly. I'm on Slide #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 impacts these actions have to 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 is reflected in the various industry forecast for 2023 U.S. housing starts, which generally range from 1.3 million to 1.4 million units compared with actual housing starts of 1.55 million in 2022 as reported by the U.S. Census Bureau. Regarding home improvement spending, industry forecasts project continued moderation in year-over-year growth in 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 continues to be favorable, supported by strong demographic trends, low home 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 to grow 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 are the constant driver behind our success. I expect our team to again deliver solid financial results in the third quarter despite the software economic backdrop. Thank you for joining us today for -- and your continued support and interest in Boise Cascade. We will welcome any questions at this time. Michelle, would you please open the phone lines?
Question and Answer Session
Operator
(Operator Instructions) Our first question is going to come from the line of Kurt Yinger with D.A. Davidson.
Kurt Willem Yinger
I just wanted to start off on EWP. Really nice bounce back in volumes like you alluded to, like as you look at the performance relative to kind of the past 2 quarters, 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 Q2?
Dean Michael Brown
Kurt, yes, it's 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. Our order file is quite strong, and our inventories are in pretty good condition. And we're operating not 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.
Kurt Willem Yinger
Got it. And I guess, 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 in lumber or upland web trusses for floor applications?
Dean Michael Brown
Yes, Kurt. So my comment would be basically the following. So we've seen obviously, a significant change in both directions over time previously, so let's say, last year, when there was a lack of availability of I-joist because really, we're on allocation, there were substitution going on pretty much by any product that 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 so because of their longer lead times, that's actually helped our I-joist business. So that's sort of a bit of a fluid situation depending on demand and supply.
Nathan R. Jorgensen
Kurt, it's Nate. Maybe just one other data point that as we have a chance to spend time with builders, their focus on cycle times is very high. And so as you think about what problems I-joist and EWP solve on the job side, it takes -- it adds 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 thinks EWP are very much part of that answer. And I think as Mike described, we're seeing some benefit of that as a result.
Kurt Willem Yinger
Got it. Okay. That makes sense. And then just lastly, on BMD. Jeff, hoping you could talk about what you're seeing in terms of customer appetite to 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?
Jeffrey Robert Strom
So I would say, overall, as confidence grew and as we had a little bit of a commodity run in there, the inventory started to build a little bit. People start taking some small positions, but nothing like in the past. And I'd tell you that people are still really relying very heavily on out-of-warehouse shipments, and that's the word we're going to continue to do this. So there's -- we're going to expect some seasonality this year, which we haven't seen in a long time. But overall, I think honestly we are going to be out of warehouse and people are not building inventories.
Operator
(Operator Instructions) Our next question is going to come from the line of Susan Maklari with Goldman Sachs.
Susan Marie Maklari
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. Can you talk a bit about how you manage or balance any sort of risk in this environment of carrying more volumes relative to wanting to be sure that you can support your end market customers.
Nathan R. Jorgensen
Yes. So, it's Nate. Maybe just I think in terms of our commitment, both to our suppliers and our customers is to make sure we are in stock and have inventory to serve their needs. Both in terms of bulk as well as units, job packs and 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 we move through the quarter through the year. and work closely with our manufacturing and supplier partners as well to make sure we have a 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 sheet to work for the benefit of both our customers and suppliers. And we're going to -- we'll be in stock. And to me, 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 head into 2024.
Susan Marie Maklari
Yes. Okay. That's helpful. And I guess when you think about the restocking that is generally happening across building product categories through the spring into the early parts of the summer. Would you say that there's 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 nuances perhaps that you'd call out in that.
Nathan R. Jorgensen
Yes, Sue, it's Nate 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 is served. If it's truckload served or rail served, sometimes it will have a different element in terms of what that natural inventory needs to be. But 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 there's any concern 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 Sue, that would represent in terms of kind of early warning signs or things that we're looking at. I think it's ultimately staying close to our customers and suppliers and then we'll continue to work from there.
Susan Marie Maklari
Okay. And then I just want to squeeze one more in. As you think about your own working capital and the investments that you're 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?
Kelly E. Hibbs
Sue, this is Kelly. So Yes. For sure, we have made some purposeful investments. I mean think about Kansas City door shop, Houston door shop, expanded some properties in BMD a handful of geographies. So probably nothing I would specifically call out other than to say, certainly, when you have a start-up, i.e., a door shop startup, you're going to be pretty heavy on inventory because you need you need to get up and you need to get ramped. But I would say, really, I think what we've seen over time in terms of how our inventory moves and how our receivables move, certainly as we get into seasonally weaker periods in the fourth quarter, I don't see that we've made enough changes that I would really give you any different guidance than what we've typically done in terms of swings.
Operator
Our next question is going to come from the line of George Staphos with Bank of America Securities.
George Leon Staphos
And congratulations on the performance. I had a few sort of modeling, shorter-term questions and a couple of longer-term ones. So first of all, in terms of BMD margins, which once again were certainly well ahead of our expectations. The outlook for the year and being similar this to the -- what you've seen in the first half of the year, Kelly, I'm not trying to draw too fine a point on it, but is that more a reflection of what you've seen year-to-date or what we saw out of 2Q? And relatedly, what do you think recognizing a lot of it is going to be the demand and pricing in the world we're in right now is the 6%, 6.5% margin normal for BMD.
Kelly E. Hibbs
Yes. I'll take the first part of that question, then maybe I'll kick it to Nate to build on my comments. So what we had 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 the -- how the mix, whether that's mixed by product or 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 for the third quarter so far. And then EBITDA margin that today we think today would probably end up towards the top end of the range that we saw in second quarter. In terms of longer term, let me kick that question to Nate.
Nathan R. Jorgensen
George, yes, maybe just on the 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 me, it is 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 in time, there's again, as you know, a lot of moving parts to that, but in terms of kind of the trend and how we're thinking about it as a company in terms of the long-term view, we're investing, and we feel really good about our ability to execute to that new standard -- higher standard.
George Leon Staphos
One thing I wanted to ask on sales velocity in 2Q. Was it where you expected it to be in BMD or did it surprise to the upside? And if so, in particular, where would there have been any variance, and if you had mentioned early in the call, and I apologize, I was a little bit late joining because of another conference call.
Kelly E. Hibbs
Yes. No, you're fine, George. I'll take that and then maybe see if Jeff has any extra color to add. I think in our comments, we've all talked about the resiliency of the market being somewhat better than we would have expected. And that did play out through the second quarter and sales activity did continue to ramp as we made our way through the second quarter. Anything else you'd add, Jeff?
Jeffrey Robert Strom
I would say on the general line piece, particularly, our volumes were very good and very strong. And having inventory available and ready to go really played into your hand and played really well for us.
George Leon Staphos
Two last ones for me, and I'll turn them over. So one, are you seeing -- or said differently, your distribution model and 2 step, is there -- are there certain product categories that you think you're gaining share in? Are there certain product categories that work particularly well given the environment that we're in through BMD? And then just real quickly on EWP again, performance has been great in Wood. I'm not trying to pick it anything, but the slight sequential drop in pricing, I think you called out, is that just a function of lagged changes or something else?
Nathan R. Jorgensen
Maybe I'll -- let me start, George, on the kind of the question for BMD and then I'll 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. And that -- but that puts more, I think, burden and really, frankly, opportunity for us in BMD to serve our customers with that more complex product line and 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 an environment where things were short in terms of availability. So we expect that kind of trend to pick up in terms of, again, new products, new services. And we think that, again, is 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, BMD is incredibly well positioned to serve and support our customers and suppliers as they kind of fit and 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.
George Leon Staphos
Are your suppliers asking to take more volume than they were, say, a quarter or 2 quarters ago, just in general?
Jeffrey Robert Strom
No. I don't think. So I think they know -- I think they're very well aware that we're going to buy to our sales pace.
Nathan R. Jorgensen
George, sorry. And then Mike on just maybe the EWP question on kind of pricing and what we're seeing and expecting there.
Dean Michael Brown
Yes, sure. George. EWP pricing, yes. But that modest decline is probably best explained as follows. So the Boise Cascade value proposition for EWP includes a variety of different components. Our field services, our soaring services, our software and of course, market competitive pricing. There are others in this particular area, the players that don't necessarily bring all those components to the market and rely more on price.
And we've had 2 on occasions -- address where we thought necessarily 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 price is the primary determinant and we will evaluate whether we need to do anything. But you can see that there was a quite modest decline in pricing and will remain to be seen whether that's the case in the coming quarter.
Operator
Our next question is going to come from the line of Mike Roxland with Truist.
Michael Andrew Roxland
Nate, Kelly, Mike and Jeff, Congrats on a strong quarter. Just one quick one for me to begin to start. Just can you comment -- I may have missed it as well since juggling a number of earnings calls today, so I do apologize for this. But if you comment on your Wood Products order files, where do they stand today versus 1Q. And if you could also just comment on maybe your operating rate and EWP and how that has changed -- and how that changed in 2Q versus 1Q? I heard the comment that you're still not running full, but trying to get a sense of where you operate versus earlier in the year?
Dean Michael Brown
Yes, Mike, I'll give you those numbers. So if you think about the second question first, the operating rate, I would say earlier in the year, Q1 is sort of a general statement. It was a little bit different by geography. So this is sort of an overarching comment. We were probably running around 60-odd percent, okay, of our capacity. Then you move into Q2, and particularly in the West, there was a quite significant increase in demand. While the South has been strong earlier in the year and continues to be quite strong. So our operating rate now, I'd say, is around 80-odd percent. And that's -- I think where it will probably stay for a while and you'll have to see what happens with the demand situation or what have you, as you move through this next quarter.
As it relates to order files, we'll start with EWP, but I'll also address plywood. So EWP order files were very strong to begin with in Q1 in the Southeast. And maybe not quite so strong in the West. And then early in Q2, the West really started to take off with the changes in the climatic conditions in California, in particular. So both the West and the South were quite strong in Q2, and we have very strong order files today, where I'll say the actions we took earlier in the year to make sure that we had enough people to run our operations as well as the $500 million that we spent last year to bring on additional veneer supply has allowed us to keep our order files and our lead times really quite sure, relative to other players in our particular space.
So our order files are strong and our lead times, while they're a little bit longer than they are normally -- they probably moved out roughly a week or so compared to what I'd call a normal lead time. That's on EWP as it relates to plywood. Yes, we've produced more plywood as Kelly pointed out, we've been moving a lot of plywood into the system. And our order files are sort of 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.
Michael Andrew Roxland
Excellent. It's great. Just one quick follow-up on that. As for order files and EWP, I know we're probably a month into the third quarter, has there been any acceleration from 2Q into 3Q?
Dean Michael Brown
No, I say, yes, that's a real good question, Mike. I think it sort of works like this. We're sort of still -- after 1 month of this particular quarter, I'd say we're still in like the height of the building season. Now we're going to go into August and September, and I think Jeff might have mentioned earlier on, the later we get into the year, seasonality starts to become a thing, particularly in our business. So at the moment, I don't see a change really much for a change in either direction, but I think we need to watch that as we sort of move through the quarter and I would expect if things go back to normal, whatever that really means these things. By the end of the quarter, we'll see some change to the normal downside, which is just the seasonality that happens towards the end of the third quarter and start of fourth quarter.
Michael Andrew Roxland
Got it. Very helpful. And then just one final question on just Wood Products in general. You guys from a cost perspective, done a fantastic job of closing high-cost facilities, streamlining the cost structure of Wood Products. Can you just comment on any other initiatives you're working on to further improve margins? And should we expect that EBITDA -- that a normalized EBITDA margin could be 20% plus for that business on a go-forward basis?
Dean Michael Brown
Well, I'll have a crack at the first part, and then I'll let my capable CFO, maybe address the second part of that question. So the Yes, we're always working on it, as you said, Mike. And Kelly kind of sort of alluded to this a little bit in his commentary we've been at, I'll 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 machine centers. That assets us in both better costs overall, in some cases because there are just -- they're 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 and sort of never ending in Wood Products, but I anticipate over the coming 3, 4, 5 years, we will continue to invest in replacing old machine centers and that will give us, hopefully, an improvement in our cost structure as we move forward. And I'm sure Kelly has some commentary on the second component.
Kelly E. Hibbs
Yes. On the second component, Mike, I mean, certainly, you can see and you can hear what the strategy and the focus has been for a long time in Wood Products, which is really to grow EWP. And as we've spoken before, the constraint was veneered historically, and we've cleared that constraint with the acquisition that we did last year. And so we can continue to execute upon our strategy. EWP, higher margin, more safely priced product, and that fits right into our strategy. And so our -- yes, so our expectations are that we'll continue to invest in that business. And to Mike's point, continue to focus on costs and efficiency. And we do want that trend to look better and the margin performance to be better than it was historically.
Operator
Our next question comes from the line of Ketan Mamtora with BMO.
Ketan Mamtora
Maybe first question to start with EWP. Any way to quantify the impact of higher OSB costs in Q3 so far as the EWP side is concerned?
Kelly E. Hibbs
Yes. So as I think we've spoken to before, we do -- the mechanisms 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, and I think you could probably use kind of North Central in terms of kind of as the index. Now our -- the OSB that we use for web stock is a pretty specific grade we have produced to meet the strength requirements we have. But you could use that as the trend in terms of where that price goes, you can kind of use that as a metric to what the cost increase would be. But again, there's going to be a lag.
Ketan Mamtora
Got it. And Kelly, typically, what is a good proxy to think about as a lag? Is it 1 month? Is it 2 months?
Kelly E. Hibbs
Yes. So it's a quarter, Keith, because we -- it's kind of that 13-week average concept that we have.
Ketan Mamtora
Got it. That's helpful. Got it. No, that's helpful. And then switching to capital allocation. Obviously, the balance sheet is in a very strong shape. You are putting substantial net cash. Curious as you navigate through an uncertain economic environment. One, either Nate or Kelly, how do you think about how much cash you should have on the balance sheet? And then as you think about deployment, whether it's M&A, historically, your preferred kind of special dividend, can you talk to kind of M&A pipeline or sort of approach to share repurchases here?
Kelly E. Hibbs
Yes. So that's a big broad question around capital allocation. Let me try to hit it this way, Ketan. 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 a strong balance sheet, that's true, and we're very happy to have that and the flexibility and the optionality that, that gives us. We did reference a robust pipeline of capital projects ahead of us in both Wood Products and some of the things that Mike spoke about and then some additional opportunities in BMD organic opportunities, maybe some potential additional new markets for door shops.
We have some lease facilities that potentially we can buy 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 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 we get to that next conversation with our Board in October. All 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 close 2023.
Operator
Our next question is going to come from the line of Reuben Garner with The Benchmark Company.
Reuben Garner
Congrats on the strong quarter. So first, a follow-up to an earlier question on the BMD margins kind of longer term. You guys know I like to ask this question every quarter. But I 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 prior to COVID? And is there any risk that like when things do officially normalize and your customers feel good again that you've got a margin kind of headwind even if demand is good because you're kind of going back to maybe a lower margin business?
Kelly E. Hibbs
Yes, good question. And we'd be disappointed if you didn't ask that question, Reuben. So in terms of the mix between warehouse and direct, I would say, traditionally, when there's confidence in the market and there's not concern around forward pricing and inventory risk, I would say warehouse traditionally maybe probably in the range of, call it, 65% or so of the mix, 65% to 70%.
And then whereas today, we're probably more like in the 70% to 75% range. And again, that just comes back to the laser focus to downstream on working capital and concern around inventory risk. And frankly, the ability -- 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 risk with going along. So that's how I frame it up in terms of the mix. But you're exactly right. That does we do have higher margins on warehouse. And so if we do get shift back to a market where there is a higher percentage of direct, that would negatively impact our margin profile.
Nathan R. Jorgensen
Maybe the other thing, Reuben, it's Nate, just to add is, again, as we had commented earlier, if you think about our suppliers, and they're adding new products and services and that complexity. So that generally creates maybe more of an out-of-warehouse opportunity as opposed to customers taking both 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 inventory footprint and really having more reliance and dependence 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. And the more complexity, the more additions there, then I think the dependence on BMD becomes more obvious as well.
Reuben Garner
Okay. Great. And the uncertainty about forward pricing, I mean, is that in all product categories? I mean we've kind of already seen it on the commodity front, at least it appears that it's bottomed out. Is the concern EWP is the concerned general line products? Is it just everything that you think the market or your customer base thinks that there's price risk to the downside? And I guess, why hasn't that been reduce just given how strong things have been to date, even in a "softer period."
Kelly E. Hibbs
I guess I'll start and then invite Jeff or Nate to add color if they want to. So if you break it into the 3 buckets, commodity, general line and EWP. 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 quarters and the recent last couple of years. In EWP, we are as we've alluded to, we are continuing to experience some level of price erosion. It's a competitive marketplace. And so we're responding where we think is appropriate. General line pricing has generally held up, but I would say there are some categories like doors, for example, that's come off some. And there are deflationary risks, certainly in the general line product category. And I think Jeff is going to add a little more color here.
Jeffrey Robert Strom
Reuben, on the general line, it really feels 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's a concern. And then I would tell you that anything that really gets imported in a container just because of the massive decrease in ocean freight that we've experienced. If you have something on the ground, and now you have replacement come, you're trying to move that off pretty quickly. So those will be the big areas of concern.
Operator
And our next question is a follow-up question from Susan Maklari with Goldman Sachs.
Susan Marie Maklari
I just have 2 things that I wanted to follow up on. The first is that in response to one of the previous questions, I think Mike mentioned that there's 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 consider what's going on the ground and the builders committed to putting starts out through the third quarter. Looking to have that inventory on hand as we go into the 2024 selling season. Is there any potential you think that we actually sort of 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?
Kelly E. Hibbs
Yes. Good question. So, this is Kelly. Yes, to your point, some of our messages, 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. August 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'll see how the macro environment plays out around monetary policy.
Jeffrey Robert Strom
I'd 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're a little bit more confident about what could be going on in fourth quarter than others.
Susan Marie Maklari
Yes. And it also sounds like there could be some incremental delays too just because of the intense heat that we've seen in some markets as well. So it feels like that's weather is a factor all around. And my other question is thinking about plywood capacity. And when you think about the demand that's coming through on EWP and your need for veneer, how are you thinking about the capacity in plywood and sort of balancing these things out?
Dean Michael Brown
So the way we look at it, it's always -- because we run this integrated model, which is a little bit different to some others in the perfect situation, we would be able to have all our stress rated veneer, so that's the veneer that goes into EWP being used in EWP because of the demand profile in that particular product group. That's really not the case just at the moment. So if EWP demand continues to be strong or picks up in theory, over time, we would have less plywood production because some of the veneer that might go into EW -- into plywood today would be redirected into EWP.
So I think Kelly mentioned earlier on, our focus is looking to put the veneer into its highest and best use. So as we move forward, obviously, clearly compared to a couple of years ago, we'll have more total plywood production simply because of the acquisition. The other item you might like to think about is if you look at the imports of Brazilian plywood, say, this year compared to the same time last year, they're down quite dramatically. And so the overall situation is that if 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 that's what doesn't have to go somewhere, and that supports the local plywood market. So plywood could be a little bit stronger going forward than maybe historically because of that, if nothing else.
Operator
And I'm showing no further questions at this time. And I would like to turn the conference back over to Nate Jorgensen for any further remarks.
Nathan R. Jorgensen
Thanks, Michelle. 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.
Operator
This concludes your conference today. Thank you for participating. You may now disconnect.
