Welcome to the Universal Forest Products Inc. Second Quarter 2018 Conference Call. Hosting the call today are CEO Matt Missad and CFO Mike Cole. Matt and Mike will offer prepared remarks, and then the call will be opened up for questions. This conference call is available simultaneously and in its entirety to all interested investors and news media through our webcast at www.ufpi.com. A replay will also be available at the website through August 19, 2018. Before I turn the call over to Matt Missad, let me remind you that yesterday's press release and today's presentation include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the company's expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in the press release and in its filings with the Securities and Exchange Commission. At this time, I would like to turn the call over to Matt Missad.

Thank you, Nicole, and good morning, everyone. Welcome to our second quarter 2018 investor call. As you know, our challenge this year is to be greater than before, and I'm very happy to announce that the UFP team was, in fact, greater than before both in the second quarter and year-to-date. We've had a quarterly growth sales record of more than $1.3 billion and topped it off with a quarterly net earnings record of $44 million or $0.71 per share. Once again, I am privileged and proud to be part of the great family of companies and people at UFP. They overcame the unpredictable lumber market and the increased cost of operations to post these record results. The lumber market played a key role in the quarter with lumber prices accounting for 13% of the sales increase. And unit sales growth was good, accounting for 8% of the sales increase. For much of April and May, the lumber market was climbing, and both bottom and top line results were very good. Shortly after the Memorial Day weekend, and at least one holiday before what we consider to be normal, the market started a rather steep decline, and June results were impacted. From mid-June until this week, the Southern Yellow Pine lumber market has dropped over $50 per 1,000-board feet. The Southern Yellow Pine market is still significantly higher than last year's level, roughly $140 per 1,000 higher. Moving forward, we expect the market to continue to find the equilibrium at lower level and function on a more typical basis for the balance of the year. Our inventory levels are at 125% of sales versus 127% a year ago, and we expect that they will be declining through the next quarter. As expected, we felt the gross margin squeeze on the…

Thanks, Matt. I'll start by reviewing the impact of recent lumber price trends. Overall lumber prices increased about 19% from the end of Q1 until June before dropping the balance of the quarter. This is in contrast with last year when lumber prices peaked in April and then fell steadily through the end of the quarter. As a result of these trends, and because our mix of sales is more heavily weighted toward products with variable selling prices in Q2, we experienced a significant improvement in our gross profit per unit this quarter. With regard to the overall level of lumber prices, average prices were up about 31% year-over-year, which increased our costs, selling prices and investments in working capital. Moving on to the income statement. Our overall sales for the quarter increased 21% resulting from an 8% increase in unit sales to go along with a 13% increase in selling prices. Organic growth contributed 7% to our unit sales increase, while acquisitions contributed 1%. Breaking down our sales by market. Sales for the retail market increased 19% resulting from an increase in selling prices of 13% and an organic unit increase of 6%. We were pleased to see the rebound in organic growth this quarter from 3% in Q1 when sales were impacted by inclement weather. We were also pleased to see our new product sales growth continue to climb since this is a key strategy to achieve continued margin improvement. Our new product sales to the retail market increased over $18 million or 23.5% in Q2. Our sales to the industrial market increased 19% driven by an 8% increase in unit sales and an increase in selling prices of 11%. Acquisitions contributed 3% to unit growth and include sales from our recent acquisition of North American Container. Organic…

Thank you, Mike. Now, I'd like to open it up for any questions you may have.

[Operator Instructions]. Our first question comes from the line of Ketan Mamtora of BMO Capital Markets.

Mike, happy birthday. First question on lumber. You talked about lumber pricing coming under pressure on the last 4 to 6 weeks. So when we think about the third quarter, are falling lumber prices a net positive for UFPI for -- in third quarter kind of given your mix between variable and fixed price contracts in Q3?

Yes. I think that's right. I think our natural shift in our product mix tends to be heavier to fixed priced products as we go later in the year. So I think you've hit that exactly right, Ketan.

All right, that's helpful. And then can you provide us with more color on idX? Is this just some contracts slipping into Q3? Or are you seeing kind of people just postponing their decisions? Just give us a little more color on what you are seeing and kind of why Q3 is falling behind.

Yes. Q2 fell a little behind, Ketan. And I think what we're hearing from the customers is that it is a very short-term push. We just did certain things they couldn't get done. And so it's a highly project-oriented business. So we do expect that those projects will be completed in Q3 and Q4. So it's not like it was a 1.5 year ago where they said, "Hey, we're just putting things on hold while we figure out what we're doing." These are committed projects and just is a timing issue. That's what we're being told.

All right. So you still think at this point, based on what you know, that you'll be able to hit the $290 million target for 2018?

Yes. That's our expectation today.

Got it. And then, Mike, can you -- on the SG&A part, so can you just walk me through when we think about kind of core going forward, is that in the $84 million, $85 million range or is that higher?

Yes. Our plans for Q2 is about $86 million. And so, when I look to Q3, I look to try to get back to plan. The areas that I've called out were a bit unusual, right? The lease termination, the health care cost, these -- we're self-insurers, we had a handful of large claims come through. So I look for SG&A cost to come back to plans on that $86 million range or so.

Got it. And then how much was a drag was freight and logistics in the second quarter?

Let me see. Transportation costs. When I go back and I kind of restate sales dollars based on last year's lumber prices, they were off about 40 basis points as a percentage of sales in the dollar amount.

And in terms of EBITDA?

Pardon? In terms of...

In terms of EBITDA? Is there an any way to quantify?

That will be $4 million.

I'm sorry?

That will be about $4 million.

$4 million? Okay. That's very helpful.

Our next question comes from the line of Steve Chercover of D. A. Davidson.

So I guess the first question is, what do you think the spread between gross profit and unit growth will trend given the volatility in lumber? And I guess given that lumber is expected to retrench a little bit?

If I had to restate that question so I understand it a little better, Steve, you're talking about the impact on gross margin?

Well, as I understand, the gross margin should expand as lumber falls.

Right. Yes.

Sounds like you're asking if we think that our gross profit dollar growth will exceed our unit growth in Q3. Is that...

Yes.

And if so, by how much? I can't give you a forecast on that, Steve, but I do think that falling lumber prices, as Matt said earlier, it should be a positive based on our mix in Q3. And I think idX's performance and expectations are on Q3, and sales being pushed there is another positive to the gross margin. So let's see how that all plays out, but right now, I'd say we're optimistic about that.

Okay. And just to clarify, on idX, it sounds like the slippage was on the customer front, not on your ability to execute. Is that correct?

Correct.

Okay. That's encouraging. And then, what did drive the strength in commercial construction?

I think, again, without getting too specific about it, our concrete forming business is improving. There's a number of projects that are ongoing, and we're seeing more growth in that entire area for us. So I would say that's the biggest part of it. And as Mike pointed out, we did pick up a little bit of growth via acquisition. So that helped us as well.

Yes. And Great Northern Lumber added about 4% to unit sales growth to commercial.

Good. Okay. And then, if I understood you properly, the revolver should be paid down by October. You've got dry powder to consummate $250 million to $300 million in acquisitions, presumably. If you -- and I know that you're disciplined. If you can't find the right deals, will you kind of, I guess, give a bit back some more to shareholders via either a repurchase or another dividend lump?

Yes. I think those are all very good options, Steve. As I look at it, I think there's 2 ways we can grow. One is via acquisition, the other is organically. We have a number of projects on the organic growth side that we can implement more quickly if acquisitions don't look like a viable alternative. But again, we like our capital allocation model today. And ultimately, all of what we do is designed to provide the best return to our shareholders over the long term. So if we can find the right investments via either acquisition or organic growth, that's going to be our first priority.

Okay. And then I realized we're only three weeks into Q3, but can you tell us about the July trend? And is there any reason to think that the fourth falling midweek is going to have any impact? Because it kind of destroyed a whole week, it's like a five-day weekend for most people.

Well, I think overall, Steve, and you know this, and probably everyone on the call understands this, the holiday week's generally cause an impact. And it's nothing that's unusual for us, but the holiday weeks are what they are and that's generally what happens. So we see sales still very strong. So we're encouraged by where we are.

Our next question comes from the line of Dan Jacome of Sidoti & Company.

Happy birthday as well, Mike. Just a couple of questions here. First, I think on the recent acquisition, you mentioned there was -- the mixed material, where there might be an opportunity there to leverage in the next couple of quarters. Can you talk a little bit about that?

Absolutely, Dan. And I wouldn't limit it to the next couple of quarters. I think it's -- probably it's a little longer-term process throughout. But one of the things that North American Container Corp. brings to us is, they've got an excellent design and engineering group. They're really good at providing solutions to their customer base and they're good at using mixed materials, of which steel and corrugated are part of that. So the integrated packaging model for them is very effective, and we see a lot of opportunities where they can help us in our locations. We also, in looking through their facilities, believe that we can provide them with a lot of help on the manufacturing side and maybe help get some more efficiencies on the manufacturing side of things. So a lot of positives on each side of that equation. And we'll be aggressively going after those over the next several quarters.

Okay. Terrific. That helps. And then my second question was just on idX. You said the order file at the moment seems to be in good shape. Can you talk a little bit more about maybe what products are in there, what end markets? Because I know they served kind of a large basket of markets or customer types. If you can talk about that, that will be great. That's all I have.

Yes. I think I can just kind of give you a broader stroke view of it. I really can't give you individual customers or individual markets. But as you know, they've shifted a lot of their focus away from retail apparel to a bunch of other industries. And we're seeing that come through in the order files is that there's much less dependence on retail apparel and more growth in a lot of other end customer markets. So that is encouraging for the long-term trend. And so, that's probably about all the detail I can give you there, Dan.

Our next question comes from the line of Ketan Mamtora of BMO Capital Markets.

Just following up on Steve's question earlier. How does your M&A pipeline look right now, kind of relative to what it has been in the past? Do you still see kind of enough opportunities in the pipeline?

Yes. I think there are plenty of opportunities in the pipeline. And I think we see a lot of activity, a lot of requests of us to take a look at different companies as well. So I think overall, the pipeline is very strong. It's really going to be a question of valuation, right, and us trying to be disciplined in our approach.

Got it. And so if valuation is kind of the biggest stumbling block, as you turn to organic opportunities, how do you think about CapEx for the back half of the year and even 2019? I'm not asking you to give sort of a specific target on CapEx, but at a high level, kind of how do you think that could kind of evolve?

Yes. That's a good question, Ketan. And I think what you'll see is that we need to goose-up our CapEx expenditure numbers a little bit really to aggressively attack this organic growth piece. So a very good observation, and that's definitely what we're doing.

Okay. That's helpful. And then last question. June housing stocks numbers that came out yesterday were quite weak given the building permits numbers are not too impressive. And I realize 1 month doesn't make a trend so I don't want to overreact. But I mean, what are you seeing in the housing markets right now? Have you seen any change from -- in the last couple of months? What are you seeing out in the market?

I think it's still generally been very good in the markets that we serve. And as you know, we're not countrywide in our site-built operations. We have tried to stay in the areas where there's a little more stability in the markets. So as our results show, it's still very strong out there. We still believe we have good order files. So we're not seeing it yet, it doesn't mean something can't change in the future, but we're not seeing it today.

And I'm showing no further questions at this time. I'd like to hand the call back over to Mr. Matt Missad for any closing remarks.

Once again, we'd like to thank you for joining us on our call this morning. We truly appreciate your interest and investment in our company. And now that the 2018 Major League Baseball All-Star Game is history, we will be hard at work to make sure that UFP is an all-star investment for our shareholders. Thank you and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Everyone, have a great day.