Boise Cascade Company (NYSE:BCC) Q1 2023 Earnings Call Transcript May 5, 2023

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 the Boise Cascade’s First 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. 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 Hibbs: Thank you, Michelle, and good morning, everyone. I would like to welcome you to Boise Cascade’s first 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.

Nate Jorgensen: Thanks, Kelly. Good morning, everyone. Thank you for joining its earnings call today. I’m on Slide 3. Both of our businesses delivered solid financial results despite the expected weaker environment from lower single-family housing starts and commodity product pricing. Total U.S. housing starts declined 18%, driven by a decrease in single-family housing starts at 29% compared to the prior year quarter. Our consolidated first quarter sales of $1.5 billion were down 34% from first quarter 2022. Our net income was $96.7 million or $2.43 per share compared to net income of $302.6 million or $7.61 per share in the year ago quarter. Wood Products reported segment EBITDA of $93.2 million in the first quarter compared to $203.8 million in the year ago quarter.

Wood Products team delivered very good financial results in an environment that requires thoughtful management of production levels given the uncertainties relative to demand. Building Materials Distribution reported segment EBITDA of $76.8 million on sales of $1.4 billion for the first quarter compared to $232.5 million of segment EBITDA on sales to $2.1 billion in the comparative prior year quarter. BMD was negatively impacted by significantly lower commodity pricing and also experienced lower sales volumes compared to the prior year quarter due to a decline in housing starts. However, demand for two-step distribution remains healthy. Our ability to provide next-day service on a range of products and services provides value to our customers as we collectively partner to manage volume and price risk during periods of market uncertainty.

Kelly will now walk through the financial results in more detail and provide an update on capital allocation after which I’ll provide our outlook before we take your questions. Kelly?

Kelly Hibbs: Thanks, Nate. Wood Product sales in the first quarter, including sales to our distribution segment, were $437.4 million compared to $558.9 million in first quarter 2022. As Nate mentioned, Wood Products reported segment EBITDA of $93.2 million, down from EBITDA of $203.8 million in the year ago quarter. The decrease in segment EBITDA was due primarily to lower plywood sales prices lower EWP sales volumes and higher per unit conversion costs. These decreases were offset partially by higher EWP sales prices, higher plywood sales volumes and lower OSB costs used in the manufacture of I-joist. BMD sales in the quarter were $1.4 billion, down 35% from first quarter 2022. BMD reported segment EBITDA of $76.8 million in the first quarter compared to segment EBITDA of $232.5 million in the prior year quarter.

The decrease in segment EBITDA was driven by a gross margin decrease of $177.3 million, resulting primarily from lower margins on commodity products and lower sales volumes across product lines, offset partially by decreased selling and distribution expenses of $20.3 million. Turning to Slide 5. Our first quarter sales volumes for I-joists and LVL were down 41% and 22%, respectively, on a year-over-year basis. On a sequential basis, volumes increased by 28% and 15%, a favorable result when compared to new single-family housing starts data. Pricing in the first quarter for I-joists and LVL were down 15% and 9%, respectively, on a sequential basis. Looking forward to second quarter, we are experiencing good seasonal momentum and currently expect both I-joist and LVL volumes to be higher on a sequential basis.

New single-family starts will continue to be an important demand driver for EWP volumes with I-joists also impacted by product substitutes and construction methods in certain geographies that reduced the wood floor opportunity. We continue to experience pricing pressures for EWP, and we expect further EWP price declines in the second quarter, although at slower rates of decline than experienced in the first quarter. Turning to Slide 6. Our first quarter plywood sales volumes in Wood Products was 406 million feet compared to 317 million feet in first quarter 2022. The increase in plywood sales volumes was partially attributed to the acquisition of the Chapman, Alabama and Havana, Florida mills in July of last year, in addition, less demand for veneer from our EWP operations resulted in more plywood production from our legacy plywood facilities.

The $367 per 1,000 average plywood net sales price in first quarter was down 47% from first quarter of 2022 and down 7% sequentially. Thus far, in the second quarter of 2023, plywood price realizations are flat compared to our first quarter average. Moving to Slide 7 and 8. BMD’s first quarter sales were $1.4 billion, down 35% from first quarter 2022, driven by sales price and sales volume decreases of 20% and 15%, respectively. By product line, commodity sales decreased 50%. General line product sales decreased 13% and sales of EWP decreased 24%. The gross margin percentage for BMD was 14.8%, down 320 basis points from the 18% reported in the first quarter of 2022. BMD’s EBITDA margin was 5.6% for the quarter, down from the 11% reported in the year ago quarter.

Looking forward, BMD sales pace thus far in second quarter 2023 is seasonally stronger with our daily average sales pace up low double digits from first quarter levels. The continued flat pricing environment for commodity products when coupled with price erosion risks on other products, will limit margin expansion opportunities, however, we fully expect BMD to continue to execute at a high level and deliver solid financial results. Moving to Slides 9 and 10. These slides show the generally flat environment for lumber and panel pricing during first quarter 2023 compared with noticeable increases for the majority of the prior year quarter. For further context, year-over-year average deposit lumber and panel prices have declined by more than 50%.

As previously referenced, this sharp price deflation has meaningful impacts on the portion of our sales related to commodity products. Future commodity products pricing may be volatile, but within tighter ranges than seen in recent years as the industry attempts to adjust supply to levels needed to support an uncertain near-term demand environment. I’m now on Slide 11. We had capital expenditures of $30 million in the first quarter with $7 million of spending in Wood Products and $23 million of spending in BMD. In BMD, our capital expenditures included the previously announced purchase of a new facility to house an additional door shop in Kansas City, Missouri, which we expect to be operational in late second quarter of this year. Our capital spending range for 2023 remains $120 million to $140 million which includes the continuation of our multiyear capacity expansion projects in EWP and further investment in BMD organic growth projects.

As we’ve noted before, supply chain challenges and availability of engineering and construction resources will influence our ability to execute on these levels of capital expenditures. In addition, our balance sheet allows us the ability to pursue additional growth organically or via M&A. Speaking to shareholder returns, we paid $8 million in regular dividends to shareholders in the first quarter. And yesterday, our Board approved a quarterly dividend of $0.15 per share as well as a special dividend of $3 per share, both payable on June 15. We have no near-term debt maturities and had total available liquidity at March 31 of approximately $1.4 billion, which reflects our cash and availability under our committed bank line. After payment of our second quarter dividend, which will total approximately $125 million, our balance sheet will remain 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 return additional capital to shareholders as appropriate via special dividends or share repurchases. I will turn it back over to Nate to discuss our business outlook.

Nate Jorgensen: Thanks, Kelly. I’m on Slide number 12. Housing starts in March 2023 were approximately 1.42 million housing on a seasonal adjusted annual rate basis as reported by the U.S. Census Bureau. In addition, mortgage rates have declined from peak levels in late 2022 and measures of builder sentiment have improved in fourth quarter of 2022 levels. 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 on future mortgage rates and the broader economy will influence the near-term demand environment. Uncertainty in the full year outlook for 2023 is reflected in various industry forecasts for 2023 U.S. housing starts, which generally range from 1.2 million to 1.4 million housing start units compared with actual housing starts of $1.55 million in 2022 as reported by the U.S. Census Bureau.

Despite the near-term uncertainty, we believe the longer-term demand drivers for new residential construction continue to be favorable, supported by strong demographic trends and an underbuilt housing stock. Regarding home improvement spending, the age of U.S. housing stock and elevated levels of homeowner equity have provided a favorable backdrop of repair and remodel spending. However, 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. In Wood Products, we are focused on continuing to execute on our targeted investments to expand our EWP capacity in the Southeast U.S. The near-term weakness in new residential construction does not detract from our conviction to grow EWP capacity.

We will also closely monitor the changing housing market landscape and maintain the flexibility to adjust production levels as appropriate to meet sales demand. B&B continues with a steady execution of organic growth. For example, our brownfield project in Walton, Kentucky is operational. We expect a late second quarter start-up in our new door assembly operation in Kansas City and our greenfield expansion in Marion, Ohio should be complete and functional by the end of this year. Our new distribution centers planned in Hondo, Texas and Walter Verizon and remain well positioned to continue our pursuit of additional organic growth and M&A growth opportunities. BMD’s approach and consistency in the marketplace remains unchanged. We’ll continue to prudently manage our inventory levels and price risk, while at the same time not sacrificing our service commitment to our vendor and customer partners.

Lastly, I want to, my gratitude to our associates, who’s proven strength and resilience when coupled with our effectiveness of our business model has allowed us to continue to deliver solid financial results despite the weaker environment. Thank you for joining us today and your continued support and interest in Boise Cascade. We’d welcome any questions at this time. Michelle, would you please open the phone line?

Q&A Session

Operator: The first question comes from Kurt Yinger with DA Davidson.

Kurt Yinger: I just wanted to start off on BMD as you — sorry about that. As you look at the volume down 20% in Q1. Is your view that’s really just end market demand or were there any kind of lingering destocking impacts in certain areas? And then second, you talked about kind of the reasons it might be difficult to generate margin expansion versus Q1, but is there anything that’s working against you or are you seeing any normalization in certain product categories that would make it worse?

Jeff Strom: Kurt, its Jeff. I will tell you on the demand in the first quarter. There was still a little bit of residual destocking that was going on as people were really focused on their networking capital, and they’re trying to get their inventories in line and we feel like we’re there, there’s been a big focus on that. So that definitely was going on all quarter long. And then obviously with the less decrease in housing starts, I played a big impact on that.

Nate Jorgensen: Yes. And then I think on your second question Kurt, around, the comments around our — the pricing environment limiting our margin expansion opportunities. So, the concept there is, if we continue to have a generally flat commodity pricing environment and there is some exposure to price degradation some in EWP and potentially in general line that will limit our margin expansion opportunities, that’s what we’re trying to get at there.

Kurt Yinger: Okay. No, that’s great. And then on EWP pricing, you talked about some additional pressure in Q2, which hopefully doesn’t surprise anyone, but we’ve also kind of heard that with orders coming back, there’s been some nice stabilization. I guess without pinning you down on where you think prices will be in the back half, are you any more confident in the idea that we can see pricing find the bottom here in the next few months relative to where you might have been at the start of the year?

Mike Brown: Kurt, its Mike. I’ll take a stab at answering that. So EWP pricing, as I’m sure you are well aware is obviously very market specific and market driven. So when we started the year, our estimation of housing starts for one thing. And I think actually, if anything, they’re probably a bit more robust at this point in time than we had originally anticipated which may be part of the explanation of the relatively small decline that we’ve seen in EWP pricing thus far. As we look out further into the year. I think the same analogy or process of determining pricing applies. If we have pretty good housing starts. I think the decline in EWP pricing will be relatively speaking, somewhat more muted. If that’s not the case, then it could be quite somewhat more significant. So it’s a bit hard to tell at the moment, but I’m sort of quite happy with where we ended up at the end of Q1.

Kurt Yinger: Got it. That’s helpful. Thanks Mike. And then just my last one, if my eyes don’t deceive me, it looks like you might have purchased a bit of stock in Q1. Any change in terms of how that ranks in the capital allocation of stack or priorities just given where valuation is and the performance of the business thus far?

Jeff Strom: Yes, good. Good question, Kurt. So let me maybe just kind of hit the overarching capital allocation discussion as part of that question. Yes, we did — we did purchase a very modest amount of shares during the third quarter. But I would tell you in terms of our overall approach to capital allocation, we did note that the board announced, an ample, but we think appropriately sized special dividend at this stage of the year were fully committed to our capital spending plans that Nate spoke to, and we have a handful of additional that we’re currently working. So, you line all that up and then we will continue to have our ongoing dialogue on capital allocation with our Board. And it’s reasonably likely, we will be having additional things to discuss around growth initiatives and additional shareholder returns to share before we close the books on 2023.

And included in that the rewarding shareholders that that’s got three-prongs as we’ve always talked about the regular quarterly dividend, special dividends and or share repurchases, so really no change to the strategy and thinking.

Operator: The next question comes from Susan Maklari with Goldman Sachs. Your line is open.

Susan Maklari: My first question is. I want to go back to the commentary on the potential for the margin deceleration in the general line of BMD in there. When we think about some of the commentary we’ve heard from the building product companies in the last few weeks and what the builders are telling us on the ground? It actually sounds like activity is seasonally building into the spring and the summer. And so I guess what are the factors that you were thinking about that are offsetting some of that how are you thinking about the puts and the take of where that margin can go and how those factors could come together given the macro uncertainty?

Nate Jorgensen: Yes, so let me start that one specific to your question around general line and I’ll let Jeff jump in here as he deems it appropriate. We have not seen a lot of price pressure on general line. It’s holding — it’s been holding and that’s generally across product lines. EWP, we have seen some pressure and that impacts both wood products and does impact BMD as well. And then on commodities, again, we were just flagging that because as when prices escalate, that gives us margin expansion opportunity and if they come off the reverse come true. We’ve seen a little bit of strength of late in OSB and so maybe we’ll get a little bit of tailwind there. But I think back to your other part of your question around order files and kind of some seasonal strength, yes, we are seeing that we are experiencing that or order files in plywood or kind of two to three weeks kind of a thing.

And EWP, our order files have expanded nicely compared to where we were at the start of the year. And there’s a fair bit of positive commentary coming out from the whole builder. So, there certainly is some seasonal strength we’re experiencing.

Jeff Strom: So, this is Jeff. On the general line margins, we’re may have been very sticky. They’ve been holding in there very, very well on overall general. There’s been an item or two that’s moved back a little bit, and if there’s any real pressure on that at all. Right now, it’s on items that are imported and the pressure’s not that the base material has dropped, it’s that the ocean freight has dropped so significantly, and those are some of the things where we’re feeling it.

Nate Jorgensen: Susan, its Nate. One final thought on that is, if you think about the purchase kind of cadence from our customers it’s instead of kind of bulk in terms of railcar and truck, we’re still experiencing a lot of auto warehouse services, support units, job packs and pieces. So as you think about margin profile and what that kind of represents in BMD, we think that that’s going to be remain a tailwind as we go through the course of ’23 because customers are still really managing their inventory risk and reward pretty carefully.

Susan Maklari: Would you say in general that what you’re hearing on the ground from your suppliers versus your customers is in line? Is it consistent or do you think one is a little more optimistic relative to the other?

Nate Jorgensen: Yes, for me, Sue like this, we have a chance to work that, and I think there’s a range of opinions and some of it is dependent upon the markets that they’re in, those that are maybe more centered on single family have had a tougher go just given what the demand dynamics have been. But I think, to me probably the optimism that’s in the market today speaks to maybe an improved environment, relatively maybe their expectations 90 or 120 days ago. So while, it’s off, maybe it’s not off to the degree that they were expecting. I think there is good sentiment in the marketplace overall. But again, I think there is still risk out there relative to things like dead ceilings, some of the banking issues that are out there. So, I think there’s the right level of kind of hesitancy as well as we kind of go through the second quarter and the second half of the year.

Susan Maklari: Okay. All right. And then one more question is, you gave us an update on some of those BMD expansion initiatives, which is helpful. As you think about this setup here and where we are, can you talk to your appetite for new projects? Is there anything else in the horizon that you’re looking at or that we should be aware of?

Nate Jorgensen: Nothing specifically that we can flag for you today, Sue, but in terms of what we spoke to in terms of a handful of additional opportunities we are working — those are the same kind of things we’ve been executing on over the last couple of years in terms of looking to scale our door shop operations, looking to expand in existing footprint as well as look for additional footprints we can expand to. So, it’s very much the same sort of strategy and the same kind of things, but nothing we can speak to specifically today.

Susan Maklari: Okay. Alright, that’s helpful. Thank you. And good luck with everything.

Operator: The next question comes from George Staphos Bank of America. Your line is now open.

George Staphos: Hope you’re doing well. Thanks for the detail. I hope you can hear me well too. I guess the first question that I had was related to what your customers are telling you about their inventories, either of wood products or of other products that you would be selling into them. Where do you think inventories are right now, guys? The second question I had is around EWP, recognizing you don’t disclose this, where would you say EWP margins are relative to what you think a normal or trend line would be over the last 10 years? And then a couple of follow-ons.

Jeff Strom: George, this is Jeff. I’ll take the inventory question to start with that because we’re in constant conversations with our dealers about that and where they sit. And as I said earlier, it has been an unbelievable focus on net working capital and days of inventory, days of sales on hand. And people have really been driving to that. The one thing that maybe has changed in the last few days a little bit, in the beginning of the year, I’d tell you, nobody would take a position on a commodity whatsoever. And some of the bigger markets right now, people are feeling a little bit better, cautiously optimistic that they may add a few days for commodities. But otherwise, it is strictly managed as a tight range right now.

Mike Brown: Okay, George, it’s Mike. Good to hear you. I’ll address the EWP margins question. So, I think as everybody is aware, over the last couple of years, the expansion in margins on that particular product line has been really very strong relative to any historical numbers that we’ve seen. Obviously, there’s been some pullback. But if you think about where I’d say, in general, the market is today relative to where it might have been before the pandemic or for this latest run-up, we’re still above what historically would have been called normal. I have — my personal view is I hope that remains to be the case because of the situation, not the least of which is the changing cost structure that we face in manufacturing. So as a result of things like increasing wages and various other components of our cost structure, I’m not sure that the prior normal pricing, be it on EWP or for that matter, other wood products is sort of a good metric to be used going forward.

George Staphos: But Mike, that’s one — just a follow- on that. I was speaking specifically about margin, which would incorporate the labor and other cost of manufacturing, at least in terms of the way I was thinking about it I asked the question. So if you incorporate that and think about the margin for EWP, recognizing you’re not going to give us to the basis point. Would you say that margins are still above normal? And is there a way to maybe roughly sort of give us guardrails on that on how much they might be? And is the expectation you hold these levels because of the secular trends that favor EWP over time or not?

Kelly Hibbs: Yes. So George, let me try it and you’re right, we’re. Yes. No, you’re good. Yes, we won’t give you to the basis point for sure. And I guess I would say, as a good reminder, we really need to think about margins kind of in BMD in totality because we are very — there’s a lot of integration between our plywood and veneer facilities and our EWP facilities. And so has the margin expanded from where it was several years back? Yes, absolutely because the price escalation has exceeded the cost escalation. That’s true. In terms of where it goes from here and where normal might be several years from now, I don’t — we don’t want to make that call. I think it’s going to be dependent upon markets and supply and demand. But I would tell you in terms of EWP capacity, there’s really no new capacity that’s been announced.

We’re going to be able to grow more because we now have the veneer availability that we now have from Chapman and Nevada. But in terms of when markets recover to a more normalized level, we feel good about our position and our ability to maintain share in our position in the market.

George Staphos: Understood. I appreciate that, Kelly. On that point, can you remind us how much of coastal’s capacity is ultimately going to be integrated into LVL for that matter, I-joist — and then one last one and I will turn it over and come back to queue. What do you — recognizing that commodity prices will swing these percentages around, do you have a longer-term target that you could remind us of in terms of where you would like EWP and general line to be in your overall revenue mix in BMD, whatever interval you want to give us next year, five years from now, what have you?

Mike Brown: So George, I’ll have a stab at your question around the thing. So when we made the acquisition, we put out some numbers, it really is not so much about how much of the production at Chapman and Havana would go into EWP initially. I think what we said was that our — after we have made some additional capital investments in our existing EWP mills and some other small investments in our — in existing plywood mills, that we saw that the total increase in billed volume, EWP volume was going to be approximately 3.5 million cubic feet. We didn’t go into the details of, as I recall, about how much of the capacity from Havana and Chapman that represented. But what I will tell you as a sort of a general statement is, we should have some additional stress rated veneer so that the veneer is suitable to go into and beyond the 3.5 million cubic feet of LVL or Phillip capacity that we would initially see.

To utilize that would require us to make some additional investments. So that was really part of the rationale behind us not getting out in front of ourselves too early in this discussion. So I think it’s best to leave it like that at the moment. And we are very, very focused on getting the capital investments made to be able to get that 3.5 million cubic feet of EWP additional EWP production.

Nate Jorgensen: Yes. And then specific to your question around BMD sales mix and the proportion between commodity, general and EWP, over the last quarters, it swung between 40% and low 50%, the commodity portion of that. Obviously, there’s been a whole lot of price fluctuation within that. With commodity prices where they are, maybe we’re back to more of a normal mix, kind of 40% general commodity, 40%-ish general line and 20% is EWP. So, I think if we go forward from here, I want to make it clear. We’re not looking to downsize our position in commodity. We just expect it to be a smaller proportion of our sales as we move forward. So we would expect the general line and EWP portions to grow and then the commodity portion as opposed to being around 40%, I think over time, probably something more like mid-30s would be more what we’d expect to see in terms of the mix.

Operator: The next question comes from Ketan Mamtora with BMO. Your line is open.

Ketan Mamtora: First one, Nate or Kelly,, I was curious, I mean, it sounds like millwork is a focus area for you guys. Can you talk about the relative attractiveness of the millwork business as we think about the total distribution chain, whether it is two steppers and one steppers.

Nate Jorgensen: Yes, Ken, good question. I think in terms of our mill work and our door investment, we feel — as always, we always start the conversation with how do we better serve the marketplace and our customers. And our customers have looked to us to continue to kind of grow that capability and that franchise in support of what they’re trying to get accomplished. So for us, it matches really well with our current customers kind of across the spectrum in terms of how they think about supporting their millwork business. I think the other thing for me is we have strong vendor alignment and partnerships, and we feel good about those relationships as we move forward. The other thing that we talked about, Ken, is just that earnings stability and consistency, for me, our door franchise, our millwork business absolutely supports that and reinforces that and allows us to continue to kind of drive our earnings performance as an organization as we move forward.

So to me, it’s again, it starts with kind of the customer as always, the marketplace and the support and I think the expectations they have from us are high there, which is great, and in terms of growing that capability, including the earnings performance as a result.

Ketan Mamtora: Got it. No, that’s helpful. And then just one follow-up on that. You talked about the earnings stability in that business. Is the margin profile in general over a period of time, if you look at it — is the margin profile also different materially different in terms of just the level of margin in that business?

Nate Jorgensen: Yes, I think, yes, absolutely. I think that the margin profile is higher. It’s more consistent and steady. We don’t see the volatility that you would see perhaps on other products, including in general line. So higher levels, I think there’s a high ability to serve and touch in terms of some of the services that we provide and certainly a margin profile as part of that story board, Ketan. So yes, I would say each of those is how we think about it, and again, reinforces that I think our commitment and excitement about how do we continue to grow that platform.

Ketan Mamtora: Understood. No, that’s helpful. And then just one last one from my side. As we think about capital allocation and comment earlier in terms of additional optionality. Can you just remind us again your cost process around kind of either share repurchases or price? Obviously, you guys have a pretty good history in recent years of special dividends. Could you just remind us kind of how you approach these — and what are some of the puts and takes as you think about capital allocation?

Nate Jorgensen: Yes, I’ll take that, Keith. And so I think your question was centered mostly on when we get to the shareholders and how do we think about returning capital there. But our first parties are really, first and foremost, thinking about the Company, how we make sure we support the asset base we have and look to grow the asset base we have in the right places and in the right matters. And then — and also what might be ahead of us? And how does that been stack up versus what our balance sheet capabilities are. And so then we begin the discussion with that dialogue and then we follow up with, okay, now how do we want to think about returning cash to shareholders? And so what you said in terms of share repurchases and dividends, which either that’s regular quarterly, which we look to grow over time, or special.

That’s — all of that is part of the conversation. But I would say that’s just an ongoing active dialogue. And I wouldn’t — it’s — that can vary quarter-by-quarter just depending upon what the opportunities are, what the landscape is, and we’ll continue that dialogue with the Board, and we will never lose sight of the shareholders.

Operator: The next question comes from Michael Roxland with Truist. Your line is open.

Michael Roxland: Kelly, Mike, congrats on the very good quarter. One quick question just for you on the margin profile in BMD, particularly you mentioned on this call as much as last call, or anything in the mix there, and if you look at performance, this quarter, fiscally given where housing was particularly impressive. So I’m wondering if you could help us frame where do you think EBITDA margins can wind up in BMD.

Nate Jorgensen: Yes. Good question, Mike. The business has done a really good job in margin performance and in an environment here in the first quarter where really no opportunity to expand margins in commodities and then we continue to execute well for our vendor and customer partners on General Line and EWP. So, the question in terms of where do we go from here? — it’s — we’ve been on record now for at least several quarters of reminding folks that historically, we were in kind of the 3% to 3.5% range in that business. And I think going forward, we view that business as a four-plus percent business. Again, as we look to continue to grow the EWP and grow the general line portion of the business that runs through BMD, that will allow us to expand those margins compared to what they were historically.

Mike Brown: Mike, it’s Dave, maybe just want to comment on that, just that again, I think the earlier discussion around warehouse services in terms of how that’s going to show up, certainly in 2023. And we think probably even into next year, again, as customers manage that risk reward in terms of book volume and price. I think their dependency out of warehouse is going to — will continue to be there. So margin profile, as you might expect on units and job packs and pieces is different than kind of direct trucks and cars. So I think that’s going to be a tailwind — continue to be a tailwind for BMD as we move forward through 2023 as well.

Michael Roxland: Got it. So would it be fair to say for sort of that’s four, and there’s nothing more. It could be given your execution thus far, I mean, we could be looking at on an EBITDA margin, but going forward, that’s levels off at least 4.5% to 5% and goes from there, given the mix shift and given what you just mentioned in terms of how these products that you’re bringing on to have a higher margin profile.

Mike Brown: Yes. We’re certainly focused on execution and looking to maximize our margin and grow our earnings and earnings stability. So yes, you’re your thought process there. And relative to where we want, what we want to do to the business, yes, that’s a fair statement. That’s a fair sentiment, and that is how we think.

Nate Jorgensen: And that’s how — to your question. That’s how we’ve invested as well. I mean so in terms of areas of focus and growth and prioritization it does, again, always stretch with the customer and our supplier base. But in terms of taking that margin profile and the consistency and how do we elevate that — that is very much part of our discussion on day and a day out basis, and again, how we think long term in terms of our investments as well.

Michael Roxland: Got it. That core — and then just quickly on EWP. Obviously, you think prices have been continuing to erode in 2Q, although they will be sequentially better. Can you just talk about maybe your operating and the broader industry operating posture? And I just want to get a sense of whether this is a downtime as well. I don’t know addition that could help minimize EWP prices.

Nate Jorgensen: Let me take the pricing question, make sure clarify what we said there, and then I’ll let Mike kind of take the operating stance. So what we’ve said there in terms of forward pricing we are experiencing pressure still. And as far as we’ve gone out in terms of giving some guidance is just sequentially second quarter versus first, which we do expect further price declines, but at lower rates of decline than what we just experienced sequentially. We haven’t shadowed anything beyond that. The marketplace is pretty fluid and it’ll be very dependent upon housing starts and operating rates, et cetera. But Mike, do you want to take the operating stance question, please?

Mike Brown: Yes, sure. So Mike, as it relates to Boise’s operating posture for EWP at the moment, which also sort of rolls over into how we operate our plywood producing facilities. I think it’s fair to say that at pretty much every location, we’re not running at full capacity and haven’t done so now since fourth quarter of last year. So there’s ample upside in terms of capacity to produce more and more EWP should the market demand present itself. And thank goodness over the last — or during the first quarter, you’ve seen by our numbers, we had a bit of an uptick. So as and when necessary, we can start to add additional shifts or days in several different locations to produce more EWP and veneer as required. So geographically speaking, I would say that the Pacific Northwest has been a little bit more challenged than the Southeastern United States.

And as a result, there’s been, I would say, as a general statement, more curtailments for us in the Pacific Northwest as compared to the Southeast. I really can’t give you a lot of good insight into the industry. I think most of the industry is probably looking at it in a similar vein as it relates to it’s all about demand. And I suspect if there was more demand, they would do similar things to what we have been doing and if we would do. That’s about as much as I can tell you about the industry.

Michael Roxland: Got you. And just one quick follow-up. I appreciate the comment. Why — can you just provide some more details around what particular course, there’s more challenges in the South?

Mike Brown: Yes, demand. Yes. So it’s not to put — because it’s not funny, but in any stretch of imagination, but the weather that we have experienced in the Pacific Northwest seems to just — it wasn’t quick. So California has been under water. We’ve had record snow here in everywhere, and it’s very difficult to build houses and particularly in the state of California, but not only because of the weather, have very, very, very stringent requirements around what you can and can’t do. And so we sort of — we haven’t really got the spring yet in the Pacific Northwest in the Southeast, again, it’s not been perfect, but they’ve had a better run. And you can sort of see that when we look at our order files, particularly for EWP, I mean, they have been significantly stronger in the Southeast relative to the Pacific Northwest.

Operator: The last question comes from George Staphos, Bank of America Securities. Your line is open.

George Staphos: At the end here for a follow-on. Two quick ones. One, can you remind us what you think normal CapEx would look like for Boise Cascade once you’re done with the expansions recognizing that you intend to grow. And so from that normal level, there’ll be growth thereafter. But in a couple of years, what might CapEx look like whatever the interval that you would say would be? And then secondly, back to repair a model, we know all the stories, all the facts behind why repair model. We have an aging housing stock, people are locked in with rates and so on. On the ground, are your customers truly thinking that, that will be the case with the state of the consumer, the state of rate, what are they telling you in terms of their outlook for remodeled units over the next year or so, given some of those constraints and recognizing fully what the secular positives are?

Nate Jorgensen: George, thank you. I’ll take the first one and then I’ll pass off the second one. So the first one around kind of what’s our normalized capital spending levels here going forward. It’s a great question. We had good dialogue on that exact topic, just a day or two ago with our Board of Directors. And so, several a couple of things to factor into the equation there, one, yes, we have grown. We have added operations in both Wood Products and BMD and then inflation has definitely impacted that equation also. So I would tell you, it wasn’t — but a few years ago, we probably thought of our kind of normalized CapEx that included maybe a little bit of strategic in it was probably in the $80 million to $90 million range as a company.

I would tell you now we’re probably thinking like $115 million to $120 million on a normalized basis going forward. Again, that’s — we have more facilities to support and we’re going to support them. We have higher costs because of inflation. And if you think about just kind of the rolling stock requirements in BMD and the more facilities, more trucks, more trailers, more, all that kind of factors into that nucleus. And so if you pay back to the $115 million, it’s probably something like $65 million in wood and $50 million for BMD. The R&R question. I think Jeff will start on that one.

Jeff Strom: It’s Jeff. On the R&R question. I’ll tell you, we’re still seeing very good takeaway on that front right there. The pros are busy, but probably not to the same level they were during COVID, but they’re still busy. We really expect to do it yourself part is going to pick up with the seasonality and with the pricing. And then what are the customers saying it, they still feel good. There’s a lot of work to still be done out there. Some things got put off. because you couldn’t get labor pricing materials too expensive, and those projects are coming forward. So the feeling out there from the customers in that segment is still going to continue to be strong for a while.

Operator: Please stand by for one more question. The question comes from Kurt Yinger, D.A. Davidson. Your line is open.

Kurt Yinger: I appreciate you squeezing one more in. I just wanted to go back to George’s earlier question on trend and EWP margins because it is a really interesting one. And I don’t want to put words in your mouth, but if you look at the historical margin profile of Wood Products with EWP encompassed within that, I think there’s an argument that they’ve kind of underperformed relative to the fact that EWP is a list price product. You have a captive relationship with distribution on consolidated number of manufacturers and there is a relationship and partnership with the end user. So I guess, at a high level, would you kind of agree with that view? Or sort of any thoughts around just the evolution of the category and the margin profile over time?

Mike Brown: Yes. That’s a very interesting question. I guess my broad answer to this is that within the EWP category, there are a variety of different approaches to go to market. We have a particular approach, and we have an excellent set of distribution and dealer partners, and we work in conjunction with all the biggest and best builders in the country. So when I think about your sort of question is, has it underperformed. I don’t think it’s underperformed really at all. I just think that ultimately, the margin is determined by what the market will bear. And so in certain circumstances, there is, I’ll say, ample availability of product. And as a result, that can end up seeing a compression of margins generally across all manufacturers EWP, in other market circumstances, the reverse is true.

There’s not enough supply and margin expands. And so I don’t — I wouldn’t support the thesis that EWP margins have haven’t performed as certainly as I would have expected or that they have disappointed. I think that’s just the way the market works. I think Nate would have some views on this, too.

Nate Jorgensen: Yes, Curt, it’s Nate. Just maybe to echo Mike’s points and maybe just a couple of others. As I think about the EWP business and the franchise, ultimately, it’s a product category that does — that solves a problem for the builder. in terms of its design capabilities and functionality and flexibility that continues to be really important. I think the other thing that the builders have been assisted on rightly so is cycle times, how do they take time out of the construction cycle and EWP is very much part of that equation and helps drive that. So as I think about today and moving forward in terms of the relevance of EWP, including the supply and demand balance, I feel good about how that category is set up, and that really speaks to our investment as an organization, as a company in terms of continuing to grow that important franchise.

So again, time will tell here as we go through the course of the year and what the housing start environment will be, especially on single-family, but again, we feel really good about that franchise as we go through the course of this year and next year, and we’re investing and building our capabilities as a result.

Operator: I show no further questions at this time. I would now like to turn the call back to Nate Jorgensen for closing remarks.

Nate Jorgensen: Thanks, Michelle. We appreciate everyone joining us on the call today and for our update, and thank you for your continued interest and support of Boise Cascade. Please be safe and be well.

Operator: Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.