Ladies and gentlemen, thank you for standing by and welcome to the Q4 2020 UFP Industries Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker, Mr. Dick Gauthier, Vice President of Business Outreach.

Welcome to the fourth quarter 2020 conference call for UFP Industries. 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 for questions. This conference call is available simultaneously in its entirety, to all interested investors and news media through our webcast at UFPI.com. A replay will also be available at that website through February 26, 2021. Before I turn the call over to Matt Missad, let me remind you that the February 24 press release, yesterday's quarterly filing 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. Now, I would like to turn the call over to Matt Missad.

Thank you, Dick. And good morning everyone. As you can see from the press release the UFP family of companies is blessed. 2020 was a unicorn. A convergence of many once in a lifetime events in the same year. Instead of collapsing under the intense pressure, our UFP team demonstrated the work ethic, experience, and quiet confidence to overcome adversity and post our best year ever. I want to give a special shoutout to our production teammates who were able to work safely every day in their facilities to make sure our customers' needs were met. Thank you to all of my UFP teammates for an amazing 2020. You have seen the incredible financial performance and Mike will provide more analysis shortly. I would like to cover some key takeaways from 2020, as well as providing a backdrop for how we look to grow in 2021. My first take away is $5.14 billion; a new sales record and the first time we've eclipse the $5 billion mark. The next takeaway is EBITDA margin of 8.4% for the year. That is a number that didn't seem achievable just three years ago. Thanks to heightened demand and a focus on new value-added products, innovation and efficiency gains, we learned that an 8% EBITDA margin is attainable and can even be exceeded with the right mix of our new products, new structure and new technology. Speaking of our new structure, we are already reaping many benefits since it was implemented in January of 2020. This new structure enabled us to react quicker to the lock-downs and to lever our scale and geography to better serve customers when extraordinary demand and print supply chains combined to caused product shortages. The entrepreneurial spirit within our new business units and segments was unleashed as planned. Our…

Thanks, Matt, and hello, everyone. This quarter provided another example of how the balance in our business and diversified product portfolio are advantages when market conditions provide challenges. In this case, the lumber market and a significant drop in demand within the commercial construction markets we serve. Our results this quarter are highlighted by a 15% increase in unit sales resulting from strong demand in the retail market and a 7% increase in operating profits, driven by profitability improvements on value-added products and new products, production and SG&A cost efficiencies, and the planned issuance of long-term stock grants associated with our bonus plan. For the year, we're pleased to report strong improvement in our profitability as our 41% growth in operating profits outpaced our 6% increase in unit sales. Our return on invested capital over 20% and operating cash flow of $336 million, in spite of record high lumber prices and strong retail demand resulting in a year-over-year increase in our net working capital. Now, I'll provide some additional color on the quarter, starting with our income statement and sales by segment. Sales to the retail segment increased 76%, consisting of a 38% organic unit increase and a 38% increase in prices. Unit growth continues to be strong across all retail business units, but especially so in value-added categories like Deckorators, Outdoor Essentials, Dimensions, and Edge. New product sales for the retail segment were also strong, growing over 71% while gross profits on those sales grew 73% in spite of higher lumber costs. Sales to the industrial segment increased 25%, consisting of a 15% increase in selling prices, a 4% contribution from recent acquisitions, and a 6% organic unit increase. Organic unit growth consisted of 3% growth driven by new customers and another 3% driven by new products. Finally, our…

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

[Operator Instructions] Our first question will come from Ketan Mamtora with BMO Capital Markets. Please go ahead.

Thank you. Congrats on a very strong finish to the year in what was obviously a very difficult year for everyone. So, congratulations.

Thank you.

Thank you. I appreciate that.

First question. Maybe starting off, we know that Deckorators, obviously are large, expanding capacity there. I'm just curious, how are you positioned right now to meet demand as we head into sort of the busy -- busy season in terms of construction activity? Do you think you've got enough headway -- headroom to meet that demand or you think you might be capacity constrained for a while, you know, till the capacity comes online?

Yes, it's a terrific question, Ketan. I think we -- we will -- already have expanded over last year where the wood, plastic composite lines that we think were in good shape there. Our mineral composite line is growing very rapidly. And we do have a longer lead time there. So look, we are being a little more selective in the customers and the products that we're moving. So I would say, if the demand continues as strong as it is, we might be a little bit short on the ability to take on a lot more customers on the mineral composite line this year until Q4.

Got it. And then, is this -- the capacity increase in Deckorators, is it more focused on sort of the Vault and Voyage line. or more on the trade head side, or is it more evenly spread out?

Yes, I would say that the wood-plastic to composite is probably 65% to 70% of the total decking volume production, but obviously the mineral composite line is growing faster and is gone from basically zero to probably somewhere in the 30% to 35% range of total, and we expect that to continue to take a larger share going forward.

Got it. That's helpful. And then, Matt, is there any way to kind of quantify how much EBITDA contribution you will get from the recently acquired businesses? Some sort of either on the EBITDA margin basis, our total EBITDA contribution? Any color would be helpful.

Yes, I think Mike probably can give you a little bit of color on that based on what we've put in the 10-K intel [ph].

Yes, I think the biggest one to look at Ketan is PalletOne and Sunbelt, right? So, the -- I mean we provided the sales numbers for 2019 and the trailing 12-month numbers through a good part of Q4. The EBITDA margins for the business, depending on which period you look at. And the margin would vary a lot between the two periods, just simply based on the level of lumber prices, if that makes sense. 6.5% to 7%.

And I think that's a blended rate as well, Ketan. So, that includes both the Industrial part of the business as well as the retail part of the business.

Yes. As Matt mentioned earlier, the PalletOne side of the business is much higher EBITDA margin, more in line with what EFPs EBITDA margins are on industrial. And likewise, the Sunbelt side of business is more in line with what we would see on the ProWood side of our business.

Understood. Now, that's helpful. And then, just switching to lumber. Obviously, we've had a big run. I'm just curious, in fact, are you starting to see any negative impact on demand from prices where they are in the middle of February?

Yes. I think with the economy being strong in many parts of the country, Ketan, I would expect that the prices continue to rise. We would see a demand impact. We haven't seen it quite yet, but just kind of some of the anecdotal information we have out there basically versus a year ago, probably $25000 increase for the cost of a new, single-family home. $9,000 increase for a multifamily unit. So, it's getting significant and there is product shortages in some categories; panels, OSB, that kind of thing. But I think there is a decent balance in supply and demand. And if the economy opens up and the mills are able to run full out and run efficiently, I think we'll be okay.

Got it. And then you mentioned any of prepared remarks, Matt, that to balance that you all are looking at other regions to purchase lumber, is there a way to kind of, maybe on a percentage basis, how much you've moved and what is the kind of flexibility that you have for international purchases?

Yes, I think it's hard to say. There are some products that lend themselves very well. I would say non-structural items in particular. And we have definitely grown purchases in those types of products. Some of the structural lumber with engineered values. It tends to be a little more limited in terms of options although there are places in the world that we can get that, too. So, we have been expanding that international capability. And I think our international sourcing and sales team has done a terrific job in finding those new products as well as existing products that help us continue our growth.

Got it. That's very helpful. I'll turn it over. Good luck in 2021.

Thanks, Ketan.

Thank you. Ketan.

Thank you. Our next question will come from Reuben Garner with Benchmark. Please go ahead.

Thank you. Good evening everybody.

Hi, Reuben.

HI, Reuben.

And congrats on the strong close to the year. Pretty impressive. Let's see, where to start? Maybe I'll start with Deckorators. So, how much -- can you tell us how much of that 80% growth was -- you guys introduced? And I think it started at the beginning of the fourth quarter, your kind of entry level composite decking board, is it fair to say it was a good chunk of that and that would mean potentially you have a few more quarters of runway from business that you picked up in that part of the business?

I think in terms of actual sales, Reuben. I don't think it's a real significant portion in Q4. I think we expect it to be a significant portion in 2021. But if you're looking at Q4 2020 numbers, I don't think it's a significant amount of the actual sales volume.

Okay. And just to clarify, when you say mineral based, that's the Eovations technology?. So, that's the -- okay.

Exactly. Eovations technology, and that's in the Vault and Voyage brand.

Got it. And then on the -- well, I guess, to wrap up the retail part. So, I think one of the concerns investors have had with names in the space is struggling with how you'll be able to grow a business that did so well in 2020. What are your thoughts on what the -- I guess the environment might be for that category for you guys in '21? Do you think you can continue to grow on top of that or do you view it as a difficult comp, and even with your new product launches and everything, that might be a tough thing to duplicate?

Yes, I think if you look at unit sales, I would say Q1, we have a very good opportunity to exceed dramatically what we did in 2020. I think the comparisons get obviously much more difficult starting Q3, Q4. So, again, as long as the demand is strong. I think the new operations that are part of the family now and the ability to help them grow and to be able to drive more value-added products throughout the entire organization, I'm very optimistic that we can continue to grow as long as the economy stays strong.

Thank you. Our next question will come from Jay McCanless with Wedbush. Please go ahead.

Hey, thanks guys. Congrats on a great year. Thank you for taking my questions.

Thank you, Jay.

Hey. So, the first question I had is just kind of reconciling what you all put in the press release about Spartanburg. The release said that the combined companies had 2020 sales of approximately $543 million. Was that Spartanburg standalone or was that Spartanburg and Sunbelt together?

It was part Spartanburg standalone.

Okay. And they're probably going to have similar EBITDA margins to what you expect out the pressure treated business?

I think going forward, that would be the case. And Mike, I believe that Spartanburg carried a lower EBITDA margin?

Yes. Spartanburg would be more comparable, but maybe not quite as high as Sunbelt and ProWood.

Okay. And then, listening to some of your competitor calls and other names in the building product space, it's been kind of hit or miss with commercial. Some people say Commercial is getting better. You guys said that you all had some issues whether it this year. Could you maybe drill down into which specific areas of Commercial you're seeing the issues and some of the corrective actions you think you can take in the short term?

Yes, that's a great question, Jay. So, I think some of them are pretty obvious. I think if you look at retail in general, obviously, not much growth there, not a whole lot of store retrofits, that kind of thing. The hospitality space was decimated by the lock-downs. So, really, nothing happened there either. Some of the Commercial office environment has been very, very slow. They were impacted. So those are the -- those would be three areas that I would specifically say 2020 was bad. And the retail space will definitely take longer. So, we've de-emphasized a lot of those products and services, and by focusing more on the areas where there is solid growth and a good sustainable future. That's where we're focusing our efforts. If the other stuff comes back, that's great. We can make ourselves available to serve that market, but for right now we are focusing on what's real and what's in front of us.

Understood. And then, your large customers, the HD and Lowe's, those reported very good sets of numbers over the past couple of days. What are you hearing from those customers and then may be the larger from repairs store [ph] industry in general? I mean, are some of the other big chains thinking this is going to be the potential for positive comps this year and are they telling you guys to gear up and get ready for larger volume shipments?

Yes. That's been their message consistently is that they need more product and they believe the sales are there. So, I think that bodes well for us. They have a good optimism and we'll be there to supply it.

Okay. Well, that's great. Thank you all for taking my questions.

Thank you, Jay.

Thank you. Our next question will come from Kurt Yinger with DA Davidson. Please go ahead.

Great, thanks, and good afternoon, Matt and Mike.

Hey, Kurt.

Hey, Kurt.

Hey, I just wanted to start out on the lumber side. I mean, pretty consistent upward trend in prices here in Q1, which typically I think might pose a bit of a headwind for you guys. But with the relative strength in retail and pressure treated, do you think that can maybe offset some of the pinch on the six-product side or how are you thinking about the net impact of the different pricing structures, just on kind of the ability to grow gross profits versus units here in Q1?

Yes, I think you have a good handle on the overall picture, Kurt. There is a bit of a yin and yang to it. So, if prices continue to climb, probably will be a short-term pinch and fixed-priced items, but we're able to make some of it up on a variable price basis. Mike, do you want to add some more color?

No, I mean that basically summarizes it well. That's the unique ability of UFP and the balanced business model is rarely do you see us have to talk about the lumber market volatility impacting our results because of the great balance in the markets we serve and in the product portfolio.

Right, right. Okay, that makes sense. And I guess just sticking with that point, I mean between PalletOne and Spartanburg, you're adding quite a bit on the treated wood side, do you think that dramatically changes the seasonality or the skew of how we should think about lumber prices overall impacting the business or do you think for the most part it's still fairly neutral from a trend perspective on profitability?

Yes, I think there's a couple of factors in there, Kurt. So, those would be kind of the geographic areas where Sunbelt operates and Spartanburg operates or -- still tend to be more of the warmer weather or certainly not be the frigid North for the most part, although they do have facilities in the north. I think the other part of it is our managed inventory programs, which I think kind of helped with some of the issues you're referring to about seasonality and is this going to be a bigger factor. I think we're finally getting to a spot and a size, as we continue to grow, where by balancing out the fixed price, variable-priced products and doing more value-added, that product mix piece becomes more important, and there is seasonality relative to the different businesses has become less important.

Okay. All right. That's helpful. Thanks. And just on the share grants and how that impacted kind of the SG&A number, is that something we should kind of expect to continue here in 2021 and how might that impact the year-over-year comps as we look at SG&A spending going forward versus what has historically been in that bonus SG&A I guess, specifically?

Yes, I think what I would say, Kirk, is just from an employee retention standpoint, as Mike commented, for us having our employees be shareholders is really important and providing a very efficient and effective way for them to get shares. It is critical to our compensation structure and platform. Mike, maybe you can give a little color on kind of the financial statement impacts?

Yes, sure. So, that $20 million that we called out as being the decline in bonus expense, Kurt, is basically the impact of the share grants spread out into the future over the vesting period. And so, we like the share grants a lot in terms of incorporating that in the bonus plan. So, to the extent we continue to do that, you're going to layer in additional expense each year. But yes, we think that that's, assuming the same level of performance, the same type of bonus expense in total, it's going to have the same impact from one year to the next. But we'll be layering in additional expense each year to the tune of $7 million or $8 million.

Okay. That's helpful. And just lastly on the Site Built side. I mean, I'm just curious with the constraint -- I guess supply side and builders really looking to catch up on significant backlogs, have you seen increased adoption of kind of those component products or anything like that? And is that an area of the business that you would perhaps look to grow in the future?

Yes, I think you're dead on that issue. The componentization is definitely going to increase. Labor, obviously, also plays into this. And the acquisition last fall with Atlantic Prefab and their related companies, I think gives us another opportunity with new materials to do more of that componentization. They're very good at it. So, we do look to expand that and we look to do more -- and do more in our factories to help the builders relieve pressure on the job site.

Got it. Got it. Okay. Well, thanks for all the details, guys, and good luck in Q1.

Thank you, Kurt.

Thank you. Our next question will come from Julio Romero with Sidoti & Co Please go ahead.

Hey, good afternoon, everyone.

Hey, Julio.

Just wanted to piggyback on the question about the SG&A and the bonus expense. I agree that they'd be the right move operationally, but just trying to think about, how should investors think about a metrics to kind of gauge your cost control efficiency going forward?

Yes, I think that the question is really what kind of metrics should investors look at relative to SG&A as a percentage of something to figure out whether we're managing it well or not? And I think that the question probably is more broad than that and that probably would include bonus in addition to the -- in-part of the SG&A discussion, right?

That's correct, yes. But considering the share grants as being part of the high now -- think about, what's the right metric to look at?

Yes. We tried to look at SG&A as a percent of gross profit dollars. Mike, maybe you can again add a little more color as to kind of the accounting side of it?

Yes, I think that's the -- that's still the right metric is we like to look at the SG&A without the bonus expense in at all, and look at the SG&A as a percentage of gross profit. It takes -- it mitigates the impact of moving lumber prices, if that makes sense. And it also takes into account the shift in the business to become more value added, which generally requires a lot more SG&A costs. So, we still think that's the right metric. If you want to compare last year with this year, I think our bonus expense last year was $68 million or something like that, and this year the total bonus expense was $80 million. So, you back those out of the SG&A numbers in the press release and look at those as a percentage of gross profit, you will see a real nice improvement. And some of that is because of the pandemic and there's probably $15 million to $20 million annually of travel and medical and other costs that we won't see repeated, a decline in those costs, but all in all, we still think we made a lot of progress on efficiencies this year.

Yes, Mike, maybe, is there a specific percentage of [indiscernible] overall that that Julio should be thinking about relative to bonus?

Oh, yes. That's a good point, I still look at the bonus expense, Julio, as a percentage of pre-bonus operating profit. And so, I think 20% is a good benchmark. Obviously, that can move around a little bit just based on our return on invested capital because our bonus rates are driven based on whatever our return on investment is. But 20% is a pretty, pretty good historical rate.

Got it. And I guess just thinking about the mix of value-added to commodity sales. I'm not sure if I missed that earlier in your prepared remarks. If you gave that for the quarter?

Yes, Mike?

Yes, no, I don't have that for the quarter, Julio, but for the year, it's about two-third, one-third; two-third value add, one-third commodity base. And that's a little bit -- that's down from last year. Last year we were seventy-thirty and -- but a lot of that I think is just simply because of the impact of lumber price appreciation and commodity products, as such a prominent impact on the sales dollars and not quite as much impact on the fixed selling price products.

Okay. Yes. Okay, I'll pass it on. Thank you.

Thank you.

Thank you, Julio.

Thank you. And our next question comes from Reuben Garner with Benchmark. Please go ahead.

Thank you. I just wanted to squeeze one more in, if I could? You talked about kind of the variable versus fixed, I think gives you a balance to offset the volatility in lumber prices, but if -- I think it was three or four years ago when prices were elevated over kind of the winter and fell into the spring season that maybe it caused a more pronounced impact for you guys. Is that a risk we should watch out for? Is there anything you guys can do to offset it just knowing kind of the price environment is so elevated now or is that less of a risk for some other reason that I'm not thinking off and we shouldn't really necessarily model in kind of any margin pain in the second quarter for something like that?

Yes, I think, a precipitous drop in the market, Reuben, always is going to leave a mark, so to speak. But I do think the balance in the business that Mike keeps referring to has helped if we're not quite as dependent on the particular, I'll say, commodity treated type product mix that tends to be the most volatile if the market falls during the busy selling season. But as you can see that the sales volumes have become a lot more normalized for a variety of reasons throughout the -- throughout the year. So, other than winter time, it seems as though as long as demand is strong, there is a better balance in the takeaway.

Okay, great. Thank you.

Thank you. And speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Matt Missad for any closing remarks.

Well, as you can tell, I'm very grateful and excited about our team's exceptional performance. Their hard work and extra effort has put us in an excellent position to succeed. We're addressing all the areas that we can control and we're also preparing for unforeseen challenges. Like the Tampa Bay Buccaneers, I'm confident that despite any challenges that arise, our team will overcome them and we will win. Thank you for your time today. Thank you for your investment in us and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, you may now disconnect.