Good day, ladies and gentlemen, and welcome to the Q2 2019 Universal Forest Products, Inc.'s Earnings Conference Call. [Operator Instructions]. After a brief pause, I will turn the conference call over to your host, Brandon Froysland, Finance Director.

Welcome to the Universal Forest Products, Inc. second quarter 2019 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 that web site through August 25th, 2019.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 the filings with the Securities and Exchange Commission.At this time, I'd like to turn the call over to Matt Missad.

Thank you, Brandon. And good morning, everyone. Welcome to our second quarter 2019 investor call. There are many headlines around the world and pockets of uncertainty seemingly everywhere you turn. But there is one thing I am certain about. We have the best team in the industry. I want to thank all of them for delivering exceptional results in the second quarter of 2019 and achieving record profits for the quarter despite a challenging lumber market.While sales were down 4% for the quarter to $1.26 billion, unit sales increased 5% overall, a solid result, but certainly not as much as we would hope for. One factor for our slower unit growth is a loss of some commodity business. We are consciously trying to eliminate sales which don't drive value. Growing revenue for the sake of revenue growth is not beneficial to shareholder value. So, we are focused on growing bottom line more than top line, while still investing heavily to support our customers to meet their needs. The bottom line focus saw terrific results as we reported earnings of $55.1 million or $0.88 per share versus $0.71 per share in 2018.A few quick financial highlights include: EBITDA for the quarter was $90.8 million versus $76.8 million a year ago. Year-to-date EBITDA was $157 million versus $130 million in 2018. New product sales were $175.3 million for the quarter, up from $149.1 million in Q2 of 2018. Year-to-date new product sales are $290.3 million, which is well ahead of our projections thus far for 2019.We use gross profit dollars per unit as a tool to measure performance because it takes out lumber market pricing as a variable. We were very pleased that gross profit dollars grew by 12.7%, more than double our unit sales increase. Now I'd like to discuss our…

Thanks, Matt. I'll begin with the lumber market. Overall, lumber prices were down nearly 37% and southern yellow pine prices were off nearly 29%. And as you'd expect, this reduced our selling prices, sales dollars and investment in working capital. It also impacts our comparisons of income statement as a percentage of sales with last year. For this reason, we think it's important to compare changes in our unit sales with changes in our costs and profits.Alternatively, the last page of our press release provides a year-over-year comparison of our income statement as a percentage of sales, adjusted to report our current year sales at last year's prices. This removes the impact of lumber market volatility and we feel it helps provide a reasonable comparison. Moving on to the income statement, overall sales for the quarter dropped 4%, consisting of a 5% increase in unit sales, offset by a 9% decline in selling prices. Organic unit growth was 4% with all markets reporting an increase. We were encouraged our new product sales growth accelerated to 18% this quarter, while continuing to contribute to our gross margin improvement.Breaking down our sales by market, sales to the retail market dropped by $24 million or 4%, resulting from a 10% decline in selling prices, offset by an organic unit increase of 6%. This unit increase outpaced last quarter's rate of 3% as weather improved, our growth of new product sales accelerated and shipments of our Deckorators product increased to meet customer stocking requirements for new business we recently won. Moving on to the industrial market, as sales to these customers increased 3% driven by a 7% increase in units, offset by a 4% drop in selling prices. Acquisitions contributed 6% to unit growth, while organic growth was 1%, which was lower than the…

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

[Operator Instructions]. Our first question comes from Ketan Mamtora with BMO Capital Markets.

Matt, Mike, congrats on a very strong second quarter. Maybe just starting off, just touch upon kind of what came in better than what you guys were expecting heading into second quarter, maybe from an end-market demand standpoint or the way you all manage costs, maybe just talk a little bit about that?

Yes. That's a good question, Ketan. I guess what I would say is that a lot of it's driven by the product mix that we had. We sold a lot more of our value-added products during the quarter. That made a big difference. And I think our guys did a really great job of executing based on the lumber market. They did a nice job in timing their purchases. And I think that helped to build in more margin for the for the quarter.

Okay, that's helpful. And then on the retail side, some of the recent reports that I've seen on [indiscernible] margin expenditures, it seemed to suggest that the market has been a little bit weaker than what most were expecting. So, can you just talk about what you guys are seeing? Certainly, second quarter was much stronger than I was expecting. So, if you can talk about what you guys are seeing right now, that would be helpful.

Yes. Again, I think, obviously, the retailers are struggling with the lower lumber market as well. So, if they look at their sales dollars, revenue dollars, that's going to impact them somewhat. I think, again, for us, it was the types of products that we're selling. And I think we picked up market share certainly during the quarter on a lot of our specialty products, including Deckorators, for example. So, I think that's probably the difference that I would say for us versus others.

Got it. That's helpful. And then just last question on sort of use of cash. You highlighted CapEx is certainly a priority, M&A as well. Balance sheet is in a great shape. So, talk about kind of how do you balance all of this and at what point do you say, okay, net leverage has reached a point where kind of it doesn't make too much sense? And from a valuation standpoint, have those valuations eased or what you're hearing around that that will be helpful?

Yes, I think if you're talking, Ketan, about the valuations in the acquisition space, again, we tend to be a little more conservative. And as I said before, the pipeline is very robust right now. I think we have an opportunity to put together some transaction. So, we're optimistic about that. I think in terms of the automation projects, we actually have a lot of projects where capital is being requested. So, I think we have ample uses of the cash. We're just trying to be judicious about how we use it.And I know people talk often about a slight downturn at some point in time over the next few years. We also want to make sure we have plenty of dry powder available at that time, so we can make some opportunistic buys. So, we feel real comfortable with the balance sheet. And as you're right, it's very, very strong. Mike Cole and his team have done an outstanding job with that. And for us, it's about how do we manage that the best, make prudent investments now and also save some of that powder for later.

Our next question comes from Reuben Garner with Seaport Global Securities.

So I'm not sure if these two are related or not, but you mentioned a loss of commodity business or maybe culling some commodity business. Can you tell us what segment that was in? And maybe if it's not industrial, can you talk about what kind of you're seeing in the industrial space? 1%, I think, was your organic unit growth, is a little softer than you'd been growing. And, obviously, you guys have a lot of drivers there. So maybe just talk about those 2 things and if they're not related.

Yes. There may be some of the commodity business in the industrial space. I think there'll probably be some more of that as we look to rationalize the customer base there where we're not making money or not making much. So, I think industrial is part of it. I think the bigger chunk probably in Q2 was manufactured housing. You probably saw a bigger loss of commodity business there. So, if I were looking at it that way, man H [ph] second quarter was more. I think there's still some room in industrial where we can cull some low margin business.

And can you quantify what the dollar amount was that you maybe culled or walked away from in the quarter?

That's hard to do. Reuben, a good question, but it's hard to do. I would have probably typically expected to see organic growth at about 4%, 5%. So, I think culling and not adding new customers probably drove the 1 % gain in organic sales versus the 4%, 5 % that I would typically expect.

Got it. Very helpful. And the SG&A side, so SG&A, you're obviously spending or investing to grow some of these value-added businesses. Is the right way to think about that going forward that you may grow SG&A in the non-bonus portion with your unit sales to continue to drive that strength in that gross profit-enhancing part of your business?

Yes, I think that's a very reasonable target.

All right. And then lastly, I'd be remiss if I didn't ask about Deckorators. You called it out in the press release. I guess a few small questions there. Any update on the size of the business now? Obviously, it's been growing pretty fast for you guys for a couple of years. You've got the new business wins. And, I guess, in that same vein, you mentioned a sell-in with a recent business win. Was that kind of a 1-quarter phenomenon or should we expect that you'd see that for another couple of quarters?

Yes, it's a great question. So I think the business is going well, the takeaway is going well. I will tell you, I think there's probably a little bit of onetime initial stocking during the quarter that won't be repeated. But I still expect there to be a good, steady, solid growth in that product line.

Okay. And I'm going to sneak one more in. You mentioned potentially investing in capacity for that business. Can you tell us where your utilization stands today and the investments you're looking to make? What kind of capacity -- for percentage increase in capacity you're making?

Yes. So I guess if we were to look at, and it depends on the different product lines, but I think what we would have is roughly a 20 % increase in capacity with the investment we're targeting right now.

Our next question comes from Steve Chercover with Davidson.

I also wanted to, I guess, parse a little bit, within Deckorators, you've had some new product launches and you've got organic volume growth. So, how much of Deckorators' growth would be lumped into the new product category as opposed to organic growth?

Yes. I think, Steve, one of the exciting things for me about Deckorators is that they continue to innovate, continue to come up with new products. So, I would say, a very large portion of their business is new product driven. And given the shorter product life cycles in that space, that's really critical that they continue to innovate. So, if you are looking at it, I would say there's a good percentage of their business that is new product related.

So within retail, even though the bulk of the organic growth with Deckorators, there's another bucket of Deckorators' growth that would be within that $175 million in new product category?

Correct.

Okay. All right. And there's a little bit of a benefit of kind of the first time placement. But, obviously, you're gaining share. So, primarily with Home Depot or --?

I really don't want to talk too much about specific customers. But, yes, the Deckorators product line is not in Home Depot in the US.

Yes, I thought that was Canada. Okay, terrific. I'll switch gears. You also did better than we anticipated in residential construction. Is there anything noteworthy you can share from a geographic standpoint? And then, how much of the outperformance versus the underlying starts might you attribute to increased truss adoption?

Yes, I would say that the performance on the construction side is really a tribute to the execution of our individuals that are running those businesses for us. They've done a really good job. I would say the market -- the markets that we serve tend to be more stable and we've kind of maintained that discipline about trying to stay in the areas where the housing didn't boom and bust. So, as we look at that, I would say they still have very solid backlogs in those markets, but it's largely execution. I would not say that there's a lot attributable to increased adoption of trusses at this point, Steve. I think it's better execution and more stable markets that we're in.

Okay. Two more quick ones to make sure I cover all the segments. On the construction side, I know you guys were experimenting with a new lagging material for large projects when there's a need to shore up a very large excavation pit. Any early indications on the success of that material?

I think the material itself will work well. Obviously, we've got to get it into the marketplace and sell it. So, not quite sure how the adoption of that will work or what kind of timeframe it'll take, but that is one of the benefits of seeing our facilities.

Yes. And then, finally, on the industrial side, we kind of look to you as a barometer of what's going on. And you've indicated that the whole world thinks we're going to slow down at some stage. Have you guys seen any indication in your order files that things are slowing down? Because I thought you were running to capacity.

Yes. I don't see anything that would indicate a general slowdown. Obviously, there are certain businesses in certain industrial markets that, from time to time, may ebb and flow. But there's nothing that we've seen at this point anyway that indicates a general slowdown. The interest rate environment is still very beneficial for business. So it seems to be kind of a steady, steady as we go process right now.

Our next question comes from Dan Jacome with Sidoti & Company.

Two questions. Just to go back to the business you culled or walked away from, I know you called –you said it was a little bit within the industrial segment. But can you help us understand how much of it was tied to, let's call it, product SKUs that are indexed to the lumber market and then product SKUs that have fixed selling prices? The only reason I'm asking is because you called out the industrial segment as being one area where you saw business that you had to walk away from. And in that segment, if I recall correctly, a lot of that stuff is fixed selling prices, I think.

That's a good question, Dan. I think the best way to look at it is if you look at true commodity-type items, which is basically lumber, lumber items and panel goods that we do very little too, so more of a direct shipper, a wholesale type sale, that's going to be more variable priced. And those are the types of sales that generally are ones we look at and say, are these value add for us? Are they value add for the customer? So, those would be more of what we're seeing.

Yes. So treated lumber in industrial segment is one way to think about it?

Yes. Very little treated lumber in the industrial segment. Again, it'd more lumber and panel goods that we're just going, truckloads of plywood, for example.

Just one more. Just want to talk a little bit about your free cash flow. Very strong. If you just look at the first half to date versus what you did the first half the day going back. As far as my model goes, several years. The second quarter itself was very strong. Keeping in mind that lumber price volatility obviously had -- it was a tailwind to the inventory dollar change quarter to quarter.So I'm just trying to understand, how much of that very impressive excess cash generated in the quarter came from that? And then, how much was -- everything you guys are doing internally to just better manage inventory. I'm just mentioning it because I think you talked a lot about the safety stock and things that you're doing internally. I know it's a very different environment versus a couple of years. So, I'm trying to understand how you're looking at it. And have you internally -- is there some sort of paradigm shift in how you're thinking about working capital or just kind of -- just like a onetime really abnormal year?

Yes, I think that has more to do with the level of the lumber market and the investment and working capital. So in that sense, it's a bit of an anomaly. Last year, the total investment and working capital from year-end was up $140 million. With lumber prices being much, much higher obviously than they are this year. This year, it's only $52 million. So that change there to me is more to do with the level of the lumber market than it is anything else.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Matt.

Thank you. As you can tell, the first half of 2019 was exceptional and puts us on a great path to achieve exponential improvement. Gross profit growth, more than double unit sales growth creates encouragement for the second half of the year. And like the US Women's World Cup team, our team has the desire and ability to win and is willing to put in the hard work and dedication to succeed. Congratulations to the US women's team and congratulations to our U.S. [indiscernible] team. While the U.S. team gets medals and adulation, our team is rewarded with shareholder value and the pride of a job well done. Thank you for your investment and trust in us and have a great day.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.