Good day, and welcome to the Q1 2023 UFP Industries Inc. Earnings Conference Call and Webcast. 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] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Dick Gauthier, Vice President of Investor Relations. Your line is open, sir.

Welcome to the first quarter 2023 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 open for questions. This conference call is available simultaneously in its entirety to all interested investors and news media through our website – webcast at ufpi.com. A replay will also be available at that website. Before I turn the call over to Matt Missad, let me remind you that today’s press release and 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. I’ll now turn the call over to Matt Missad.

Thank you, Dick, good afternoon, everyone. Thank you for joining our first quarter 2023 conference call. [Technical Difficulty] something unpredictable would happen, but in the end, everything okay. [Technical Difficulty] chaperoning through a tricky quarter and we were able to report earnings per share of $1. 98, which exceeded our analyst consensus estimate. The first quarter results were generally in line with our expectations, although some unanticipated things happened. As an example, January was in line with expectations. February was below and March was above. We will review the results by segment, but the overarching theme is that challenges will continue as the economy is affected by interest rate changes, reactions to unsustainable federal debt levels, and the resiliency of consumers. We plan to anticipate and meet the challenges head on. As we discussed in February, the year 2023 will not likely be smooth, but we expect it to be more in line with pre-COVID economies plus normal growth. Our team is focused on executing our plans and taking advantage of opportunities if others stumble. We have accumulated a significant amount of capital and will stay operationally aggressive and fiscally conservative using our balance sheet to support our growth and value creation. Our unique business model allows decisions on cost containment, staffing, and inventory levels to be handled by those closest to the actions, and we don’t wait for events to make decisions. Our growth hasn’t affected our agility and we intend to keep it that way. Now, let’s review segment performance and outlook. In retail solutions as a value-added manufacturer, seller, and self-distributor, our products provide solutions for the DIY consumer as well as the professional contractor. Our strategy in this segment is simple, provide innovate a new products and solutions, find, harness and expand opportunities, select and build…

Thank you, Matt and hello, everyone. Our results this quarter were in line with our overall expectations and included a 27% drop in sales to $1.8 billion, consisting of a 20% reduction in selling prices, primarily due to the decline in lumber prices we passed on for our customers and a 7% decrease in units. A 37.5% drop in operating profits to $162 million, resulting in a decremental operating margin of 14.6%, slightly better than the 15% to 20% range we estimated for the year. A $208 million improvement in operating cash flow compared to last year as soft unit sales and low lumber prices reduced our seasonal increase in networking capital. And a balance sheet that continues to gain strength with a net cast surplus of $145 million this year compared to net debt of $410 million last year. By segment, sales in our Retail segment dropped 25% to $750 million consisting of a 23% decline in selling prices and a 2% decrease in units. Given market conditions, our unit sales held up well this quarter, primarily driven by our ProWood and Deckorators business units. Our unit sales to Big Box customers also held up well with a 6% increase for the quarter while our business with independent retailers, which is more closely correlated with new housing starts dropped by 17%. Also, our Big Box customers continue to pursue a greater share of professional contractor business. Our retail operating profits dropped $41 million this year. A 42% decrease from last year resulting in a 12.5% decremental operating margin. As we mentioned last quarter, we expected a difficult comparison in Q1 this year for retail. Last year retail, which has a sales mix heavily weighted toward variable priced treated lumber, greatly benefited from a rising lumber market that reached over…

Thank you, Mike. Now I’d like to open it up for questions.

Thank you. [Operator Instructions] And today’s first question will come from the line of Stanley Elliot with Stifel. Your line is open.

Hey everyone. Thank you guys for taking the question. Impressive in the environment but I guess I’d like to start off on the packaging business. I mean, we’ve seen PMI as you mentioned, them being down kind of 46ish, but we’ve had five quarters or so sub-50, they’ve kind of rebounded here, should your packaging business track that, but maybe on a lag or do we think that, some of the outgrowth initiatives you all have in terms of like gaining share and gaining customer wallet, can actually help that part of the business perform better?

Yes, I would say it’s the latter Stanley. I think, it to me it’s just the data point to consider it. I think our team; the market was soft in the first quarter, no doubt about it. I expect it probably will be a little soft, but we see signs of improvement and I think that’s the important thing, but most important is what you outlined at the end there, which is our ability to gain market share and provide new innovative solutions we expect will help us kind of regardless of market size.

And then kind of switching gears, you mentioned well, I thought I heard positive commentary around the Deckorators product, if that’s so, would love to hear a little bit more about that. And then, more broadly, how are you all thinking about the retail business? The news that’s constantly talking about the consumer getting stretched and I do think the Big Box channel’s positioned to outgrow, other distribution networks, but if you could kind of like elaborate on a little bit, those two would be great.

Sure. So o on the Deckorators side, obviously we’re excited about the future. The, certainly the mineral based composite, which I talk about a lot is something that we’re excited about a lot of potential new products for that technology. And I think the rapid rail system among other things that are being added to the extent that we can tie those together with our decking sales and get more of a share of the combined total that’s a big plus for the Deckorators and the Deckorators brand. I think if I look at retail in general for your second part of your question, there is a slight reduction, 2.8% I think over the next basically year is what’s being predicted in the repair and remodel index. But I like the customers that we have and I like the approach we have and I really think with the combination of both ProWood and Sunbelt and the strategies that our retail group has that we should be able to take share. And so I would expect getting growth from share and as long as the market holds reasonably well, we should be very, very good. I think the challenge through everything is what happens, if the consumer loses confidence.

Right. And I guess one, one last quick one if I could. You mentioned, comment around January, then February and March. Could you share or care to share anything around how April is looking thus far?

Yes, I think it’s kind of – is going to look at it the trend is a positive trend from March and I sense that is continuing, at least at this point.

Great guys, thanks for the time and best of luck.

Thank you.

Thank you. [Operator Instructions] And that will come from the line of Reuben Garner with Benchmark Company. Your line is open.

Thank you. Good evening everybody. Matt, thank you for the MGK lyrics, I appreciate that. Maybe if we could start off with the a follow-up on the retail side. So Matt, you mentioned inventory in the channel I think was better balanced. Can go into more detail on that? We’d heard in a few building product categories that maybe retail or inventory retail had gotten too low and things are maybe starting to normalize in the other direction. Just curious if you’re seeing that and if it’s different by kind of product categories.

Yes, the reference that I made was to the Edge product line Reuben, but I think there’s probably a fair amount of accuracy to the comment about just generally carrying a little less inventory, not quite as heavy as they were. So that makes it a lot easier for us to manage and as Mike alluded to, for us to be able to help manage our safety stock levels back to a more normalized kind of situation. So cautiously optimistic there.

Okay. And then kind of a broader question about pricing. You guys have sort of distanced yourself I think increasingly so in recent quarters from commodity price action, and I was wondering if you could talk about some of the value-added areas maybe some areas where pricing’s holding in, better than it historically has or areas where there’s more pressure than others. Anything that jumps out to you, for some of the things that, areas where you’ve moved into more value-add versus the commodity piece that would be…

Yes, I think we talk a lot about converting customers from sticks and panels to more designed engineered manufactured products. So we see that both on the industrial side and on the concrete forming side as examples. So those are areas where we can help drive that process. I would say the other key portion of this is to try to make sure that we are at least paid reasonably for a lot of the products that we do put a lot of effort and energy into treated lumber being one where, we probably haven’t been fairly rewarded for the value of that product. So we continue to try to make improvements there in that model. And that’ll be important to, to future value-add sales. With respect to some of the other commodity type business, we are trying to deemphasize that where we can but we also recognize that some of it is the bread and milk that we need in order to get the rest of the value-added products to the customers. So I know each of the business units and each of the segments is very, very focused on trying to maximize the value-add. Developing new products is an area for us to help enforce that and to help that to grow as well. So we’re coming at it from a lot of different angles and we expect that to continue to improve.

Understood. Congrats on the results in a choppy period and good luck going forward.

Thank you, Reuben.

Thank you. [Operator Instructions] And that will come from the line of Ketan Mamtora with BMO Capital Markets. Your line is open.

Good afternoon. May be to start off…

Hi, Ketan.

To start off, can you talk a little bit about your comments on the prepared remarks? So you said, Site Built was a bit of a pleasant surprise. Curious if you can provide some additional color in the context of the sharp drops that we saw in building permits and starts late last year. So as we cycle through that so far as consumption of materials is concerned, so if you can elaborate on that, that would be helpful.

Yes. Let me try to make sure I understand the question well, so basically if I looked at it and you can kind of tell what our expectations were with when I said, January was in line, February was below, and March was back in line again. And I think I would take a look at Site Built in a similar vein and say that, we provided detrimental margin information last year. We talked about what that might look like. And I would say to the credit of the Site Built management team and all the people on that team, they’ve been able to outperform even though sales have been less than certainly they wanted, but they’re in line with what our expectations were. And I think what we’re talking about at this juncture is the way March rebounded from what the low was in February, it appears that there’s more strength in that market. So we feel much better about that today and feel very confident in our annual numbers where ahead they all look like February we would’ve been less confident. I know I’m taking down a long walk around the block heating, but I think that’s hopefully that answers what you were trying to get at.

No, that’s certainly helpful. And Mike has the – has that part of the market become just generally more competitive so far as you can tell, given, lumber has come down, demand has eased. Curious if the competitive dynamics have changed at all.

Yes. I think there’s a – I’ll say a couple components to the competitive dynamics. One is the situation, which we were fortunate to have a little bit of over the last few years, which was the demand far outstrip supply. So there was actually a positive pricing element to the – to our sales. That premium I’ll call it is gone. So that by itself creates competitive dynamic. And then with pricing being lower that’s going to create a competitive squeeze as well. I think if I look at some of the services we offer in our value-based engineering, some of the other component services in the customer relationships that our team has been able to forge I think we still become a preferred supplier and there is a value in making sure that they – our customers know we can deliver when we say we are. And I think that’s a big benefit for us.

No, that’s helpful. And then final question from M&A standpoint, obviously the balance sheet is in very strong shape. Curious where you see kind of most opportunities. You talked about reviewing a number of opportunities. Where would you say you think there is the most potential?

That’s a great question. And I think each one of the business units has identified targets that they feel are very important to their future growth. And that’s creating what I think is a terrific competition for capital, trying to find the transactions that make the most sense, that can bring the biggest impact over time. So I – we’ve talked a lot about the industrial and packaging space, which for us is really total packaging now. I think what we also would look at areas such as concrete forming where there’s some opportunities to convert more value-added sales. And I think on the retail side, there’s some very good opportunities there for mixed materials and other things. So I don’t think there’s a shortage of opportunities, Ketan, our challenge is making sure that we maintain our fiscal conservatism as we evaluate these opportunities. And as I mentioned in my remarks, I think the – probably the bigger challenge is people thinking that the hockey stick that they are planning going forward is real when it may or may not be.

Got it. No, that’s very helpful color. I’ll jump back in the queue. Good luck for the rest of the year.

Thanks, Ketan.

Thank you.

And thank you. [Operator Instructions] That will come from the line of Kurt Yinger with D.A. Davidson. Your line is open.

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

Hey, Kurt.

Just look at the retail gross margin, I mean absent any big changes in lumber pricing going forward is the Q1 kind of 12.6% number kind of a reasonable run rate? And then any kind of mix impacts to be aware of in Q2, maybe like a little bit heavier on the pressure treated side that that could weigh that down or how do you think about that?

Yes. The biggest drivers within gross margin that Kurt, so if you – if we get a market that stays pretty well deflated like it is now and we don’t get a lot of sequential volatility, the big drive, so taking the lumber market swings out of it because of the amount of variable price treated lumber is then it’s really more mixed changes. And I think you’re going to see more treated lumber like you said in Q2, a little bit, a little less of that than in Q3. And so while volumes pick up tremendously in Q2, right, the mix is more weighted towards treated lumber and could move margin down, but you have a lot more sales dollars. So profitability would it be expected to be way higher.

Right, right. Okay. Perfect. That makes sense. And then in the Packaging business, I mean we kind of finally saw pricing flip to a headwind. Is that all flow through from lower lumber prices maybe on just a bit of a lag or any other areas of pressure from a pricing perspective with customers?

Yes. What I would tell you is I think most of the lumber market flow through has been built in at this point. I think the question about how slow are the customers going to be is that some different runways may be more of a longer-term slowdown, others will bounce back and that’s the beauty of the balance model of the customers that we have. So what I would tell you is I think there’s probably increased in quoting activity right now as people who are not as busy as they were before are starting to take a look and trying to squeeze where they can. So again, I think the benefits that we bring allow us to provide more value for the customer, but there certainly will be that kind of normal pressure in the marketplace that hadn’t existed in 2021 or 2022.

Got it. Yes. That makes sense. Okay. And then just on detrimental margins Mike, forgive me because I missed this. What was kind of the outlook for that within the Retail segment for the year?

We didn’t provide one. So we guided you, I guess, last time we spoke for Q1 results that would be well below last year. So we knew that was going to happen given the dynamics with the lumber market and – but we had said that we felt like, once we get past Q1 and we look at the full year in Q2, Q3 and Q4, we would more than make up for whatever shortfall we had in Q1, because whatever we made in Q1 last year, we gave back and then some in Q2 and Q3. So with a mark – with a lumber market where it’s at today, we still feel like – we definitely feel like that’s the case. So the shortfall that we have so far for the year, we’re going to more make up for the next nine months.

Got it. Okay. And then last quarter you talked about, I think decremental operating margins 15% to 20% for the year. You guys – I guess said that Q1 was pretty much in line with expectations, but anything from a market or performance perspective here early in the year that makes you feel like you can do a little bit better or come in at the low end of that range or any thoughts around that?

Well, I think – we feel good about where we sit today. But the guidance that we gave is for the full year and I think the guidance has to reflect some uncertainty about – still about severity and duration of any recession and we’re already in one today. So I think we still want to be conservative in how we look at that. And so those ranges I think are ones that we’re still going to – still look to.

Yes, and I’d probably add Kurt, there are some opportunities for improvement. I know each one of the business units and segments see some different things that we can do to improve, but Mike’s right, there’s other external factors that we can’t control. So we’re going to continue to work on the things that we can improve and hope the external factors take care of themselves.

Right. Yes. Still early in the year. Makes sense. And then just last one for me, Mike, what was bonus expense here in Q1?

The bonus rate was about – we accrued to about 20% of pre-bonus operating profit. So with that number you can – and you have the operating profit numbers, you can calculate what bonus expense was pretty close.

Got it. Okay. Thanks for the detail guys. Good luck hearing Q2.

Thanks, Kurt Yi.

Thank you. [Operator Instructions] And that will come from the line of Julio Romero with Sidoti & Co. Your line is open.

Hi. This is Stefan Gillo [ph] on – hello. Hi, can you hear me?

Yes.

Hi this is Stefan Gillo [ph] on for Julio Romero. How are you?

Good, how are you?

Good. Thank you. I guess, my first question is, can you talk about your execution in retail and the progress in your segment President is making on creating synergies and scaling your products?

Sure. I guess, so if Will Schwartz who just got into the role on January 1 is doing an excellent job, he’s working with his team and helping to drive the business and I think we’re very optimistic about where that business is headed.

Thank you. And can you also talk to pricing trends in the construction segment? Like, how much more do you foresee prices in that segment coming down before we see some stabilization there?

Yes. That’s a really tough question. I try not to get into specific pricing, particularly by segment or by business unit. As we outlined before, I think the lumber market pricing and probably any premium from the demand far outstripping supply, those are already out of what I would say is pricing in Q1. So for us, it really becomes what’s the demand look like going forward. And as long as the demand is in the range that we estimate it is, then the pricing we think will be somewhere in the range that it is.

Thank you. I guess, the last one for me, can you speak to the potential impact on the regional banking crisis, whether to your FBI or to your customers, suppliers, et cetera?

Yes, I wish – well, I could probably speak for hours on it, but I don’t think it’d be particularly useful for anyone, because I don’t have any specialized knowledge in the area. I think what it indicates is that interest rate environment has caused some issues and so it has ripple effects. And so from our standpoint, we’re just looking to see what the next moves that the Fed makes are, but at this point, very difficult to predict if it’s a broader based issue or just specific to a small number of banks.

Thank you so much for taking my questions.

Thank you.

And 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, thank you again for joining us today. 2023 will be a challenging year. And as we all know with what might be the world’s largest toddler birthday party in DC will still keep our eyes open. I know our team thrives on a good challenge. So while it’s snowed in Michigan this week, let’s hope for sunshine in Q2 and throughout 2023. And I know that no matter what the obstacles we face, our team plans to roll with the changes and come out ahead. Have a great day.

Thank you all for participating. This concludes today’s program. You may now disconnect.