Good day and welcome to the Q2 2024 UFP Industries, Inc. Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. [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. Please go ahead, sir.

Welcome to the second quarter 2024 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 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 will now turn the call over to Matt Missad.

Thank you, Dick, and good morning, everyone. We appreciate you taking the time to listen to our second quarter results and to hear what our plans are for the balance of the year and beyond. The second quarter was generally in line with expectations and our team was able to roll with the changes in the economy and in the demand. I'd like to thank them for their excellent work. If the last couple of months are any indication, we will need to follow Bowie's advice to turn and face the strange changes. Factors such as a stranger-than-fiction election season, a Fed which like an adrenaline-fueled Olympian may have over-rotated on the landing with the higher for longer interest rates, and an eye-popping federal debt will cause further economic concerns. The balance of 2024 is likely to be more challenged than originally forecast. We are seeing declines in unit volume in most business units. Slack demand creates competitive pressures as supply outstrips demand. Any reduction in interest rates during the balance of 2024 is unlikely to spur enough growth to provide a material impact in 2024, but could aid 2025 and beyond. Our near-term focus is on maximizing capacity utilization through strategic facility rationalization, weeding out under performance, reducing SG&A costs in the nonstrategic and noncritical areas to keep them in line with gross profit targets, and to simplify our operating structure even further. Because automation and plant specialization have made us more productive, it enables us to further consolidate locations. Delivering exceptional customer service is a key driver for many of our locations, as is avoiding additional freight costs from being further from our customers. However, as we have expanded our transportation capabilities and improved our manufacturing efficiencies, we have more opportunities to consolidate manufacturing, offset cost increases, and…

Thank you, Matt. Our consolidated results this quarter include a 7% drop in sales to $1.9 billion, largely driven by a 6% reduction in selling prices while unit sales declined by 1%. The decline in selling prices resulted from a drop in lumber and more competitive pricing in most business units. Our overall unit sales held up well this quarter in spite of a more challenging demand environment due to the strength of our balanced business model. While adjusted EBITDA dropped 13% to $204 million, we are pleased to report our adjusted EBITDA margin remained well above historical levels at 10.7%. I was also pleased to see our cash cycle improved to 56 days this year from 63 days last year, reducing our investment in net working capital throughout the quarter. Our trailing 12-month return on investment capital also remains at historically high levels at nearly 20%, almost 2x times our weighted average cost of capital. We continue to increase our dividends and more aggressively completed share repurchases at favorable prices. And our balance sheet continues to gain strength with a cash surplus that's grown to over $1 billion this year, providing us with flexibility to pursue our financial and strategic objectives. Moving on to our segments. Sales in our Retail segment dropped 14% to $809 million, consisting of a 7% decline in selling prices, a 2% decline due to transfers of certain product sales to other segments, and a 5% decline in unit sales. The unit decline was comprised of a 5% drop in volume with big box customers while our volume with independent retailers was flat. By business unit, we experienced a 6% decline in ProWood, a 4% decline in Edge, and a 2% decline in our Deckorators business unit. We were pleased with our overall sales of…

Thank you, Mike. And just to clarify, I think the dividend that was recently approved is payable in September, not in June, so I just wanted to clarify that. And now I'd like to open it up for any questions that you may have.

[Operator Instructions] And our first question will come from the line of Reuben Garner with Benchmark.

Thank you. Good morning, everybody. There seems to be an increased focus, maybe it's just me picking it up in the press release or your comments this morning. But on market share gains, and I understand the story in Deckorators for sure, I was wondering if you kind of elaborate on some of the opportunities or thoughts you have in some of your other markets, whether it's Construction or Packaging.

Sure, that's a good question. From a construction standpoint, again, we're trying to drive some new product, some innovation. You mentioned the recreate brand for manufactured housing, Factory Built opportunities appear to be much stronger. Again, we've reiterated this many times, but the affordability of Factory Built housing is a very positive outcome, we think, and it's going to continue to drive more housing that direction. One of the reasons we believe that housing is struggling to meet the needs is because of the affordability factor, and we think Factory Built has an advantage there, so very optimistic. On the Site Built side, again, the opportunities, as Mike mentioned, are geographic expansion. There’re markets that we're not in today that people are migrating to, and we think those are going to be very strong going forward as well. On the Packaging side, we're trying to rationalize not only our facilities, but also our customer base, and there's many customers that we're working to gain share with. We're trying to win customers, and that's where we're going to pursue the market share gains. There may be others that we can't get low enough in price to make it work for both the customer and for ourselves, so that's where there's a balance within the packaging space, and I think also on packaging is the protective packaging materials and the opportunities in alternative materials such as steel that we want to take a look at and grow with. They serve a different customer and provide some different opportunities for us as well, so that's a quick overview, Reuben.

Great, and then you mentioned competitive pricing pressures, I think, in the packaging business. What about in retail and in construction, anything that you would call out in either of those end market from the competitive pressures? I know pricing was down year-over-year, particularly in construction, but more on a sequential basis, have you seen any kind of competitive pressures pick up in either of those markets?

Yes, I guess what I would say there, Reuben, is that within the big box segment, the pricing is adjusted based on lumber markets, so there's already rationalization on the price side. With respect to construction itself, there's adjustment periods every 90 days or so, so I think those largely get adjusted based on market trends and market changes. Not to say that there aren't some there, but I think they're much more manageable at this point.

Our next question will come from the line of Kurt Yinger with D.A. Davidson/

Great, thank you, and good morning, everyone. I wanted to start out with Deckorators. And Matt, you had made a comment in the prepared remarks around maybe some shift in customer composition. And it kind of dovetails into what has been some discussions around some shelf space movements for 2025 following line reviews. And I guess I'm just wondering, are you expecting any changes in your retail positioning heading into next year? And if so, how should we think about kind of sizing that impact?

Yes, it's a good question, Kurt. I think, obviously, product line reviews are a process. And we go through those periodically. We're in the midst of those now. What we believe is we're going to increase our overall volume. I'm not going to comment on where or how at this point. But we're very optimistic about the future. And I think the other part for Deckorators, is that we have a number of opportunities with new products that we just haven't had the capacity to go after. So it's really a twofold. We think we're going to increase sales of current products. But we also see an opportunity for a lot of new products. And that's what we're excited about.

Got it. And I guess the earlier question kind of touched on competitive pricing activity and in Site Built. Would you say that pressure is accelerating or pretty consistent at this stage? And if you just look at kind of the single-family numbers, it's not robust. But it seems like a pretty healthy market overall in terms of the start levels. Is it the slack kind of capacity from multifamily freeing up? Is it new facilities expansions kind of across the industry, creating some supply mismatch? I mean, what would you say is kind of driving that overall pressure?

Well, I agree with your assessment. I think single family is solid, multifamily decline is probably creating some capacity availability, and I'm sure folks are trying to fill that capacity somehow. So to the extent there's pressure, I think that's where it's coming from, at least at this point.

Got it. And then, just last one, on the retail side, I mean, there's another impressive gross margin quarter, despite what I think would be some level of headwind from the trend and lumber prices on the tree to business. I guess, could you just give us a little bit more color around some of the operational improvements that you kind of referenced, and where that margin enhancements coming from?

Yes, that's a good point. What I would say, Kurt, is we're realizing a lot of the changes that were made when we went from a geographic-based to a market-based. We're seeing the retail team and the ProWood team in particular do a really good job of driving in efficiencies in their operations. They're utilizing best practices even better than they have in the past. So I think we're seeing a lot of operational efficiencies driving it in. And I think there's more of that to come through equipment enhancements. So I think the market itself, as I mentioned before, I think to the extent that we're selling through box, prices are pretty much determined. So I think at this point we're just trying to be as efficient as we can, make sure we're keeping our SG&A costs in line, and drive as much improvement as we can.

Adding on to that for a minute, Kurt, as a reminder, the Spartanburg and the Sunbelt plants were purchased a few years ago, and squeezing out the operating improvements in those businesses was going to take time. So part of the driver for the operating improvements is just continuing to enhance the operations of those facilities.

One moment for our next question. And that will come from the line of Ketan Mamtora with BMO.

Thank you, and good morning. Let me start with, if I heard you right at the start of your prepared remarks, you talked about kind of pretty meaningful investments. If I add all of them up, it sounds like about $1 billion. Can you give us some sense of what kind of timeline you're looking at, and what kind of return expectations you have from these investments?

Yes. I think, Ketan, as we looked at where we want to grow, each of our business units as solid strategic runways they want to pursue. Our typical first preference is M&A type transactions, because they get us into the space quicker. They bring more people with them, and they bring quicker returns generally. So because of the pricing in that marketplace, we're just taking their plans and we're pivoting towards either organic or greenfield type opportunities. And for us, we called out 24 months, but maybe slightly longer than that, maybe slightly quicker depending on how much we can deploy and where the opportunities are. But the main focus is trying to show for our investors that we have a plan to deploy that capital to provide the returns that we historically have provided. And as everyone knows, it takes a little longer to get a greenfield or an organic type operation up to ROI, then if you acquire something at a reasonable price, but we think long-term it's going to continue to drive the value and will make us more profitable, less goodwill, and better results.

Got it. So is it fair to say, so did I hear you right that this is over the next two years or this is kind of spread over a longer time frame, Matt?

Yes, like I said, Ketan, and I'll have Mike kind of chime into it. I think we set out five year targets. We want to be able to allocate areas over the next 24 months where they should go. And we have a lot of requests for capital, but we're going to prioritize and go through that process. So within the next 24 months, to the extent that we haven't deployed it, we will have to plan for where it's going to be deployed.

Got it. There's always kind of a lag, Ketan, between the time where you've got your plans squared away and when the spend actually occurs. And so the way that I think about it is we laid out our five year targets for sales growth, unit sales growth, and EBITDA margin and returns. And in order for us to achieve those targets, this is the capital that will need to be deployed.

I see. Understood. Now that makes sense. And then just focusing a little more on the packaging side and understand that the markets are challenged right now. But curious, as you think about the sort of the growth there and the investments there, has your sort of thought process changed at all in terms of true cycle earnings and margins in the packaging business. I know in the past you've talked about packaging as being a key area of growth, you clearly highlighted kind of more investment there, but margins at least, and volumes in the last six quarters or so have come under a lot of pressure. So how do you sort of balance sort of investments versus what's going on in the market today?

Yes, what I would say, Ketan, and I'll ask Mike to add some color to this too, but we focus on the EBITDA margin in that space, and we still believe that that can be a very strong EBITDA margin business right now getting demand and capacity in line is our priority. I think once we get there, that will improve. The market's going to be what it is right now. I think it's just generally, it's a little more challenged today, but we think long-term it'll revert back to more of a normal market condition, and there's still consolidation opportunities in that space. So if demand remains lower for longer that will create consolidation opportunities as well. Mike, any color you want to add to that?

Yes, Ketan, I think I'd just kind of maybe dive into the details on the margins and how they've changed. One factor that I look at is cost variances. We employ standard costing here, and so I can see unfavorable cost variances coming through all the different facilities within packaging. And for the first six months, it was $20 million. So that annualizes to a pretty big number. And I think being able to take a step into capacity consolidations and trying to get our cost structure appropriate and optimized for demand, there's a big margin lift there, and then making these investments in the business that Matt talked about that prepare us for more growth and being able to leverage volume increases over time in the future.

One moment for our next question. And that will come from the line of Stanley Elliot with Stifel.

Hey, good morning, everybody. Thank you all for the questions. Can you talk about the new products you guys are working on? How are these margins stacking up versus the rest of the portfolio and the importance in kind of reaching the 12.5 kind of longer term target on EBITDA?

Yes, that's a good question. And as Mike indicated in his remarks, we do have a higher target return for new products, and all the new products are meeting those, that higher target. So I think that's a plus, and I think the ones we're working on, the whole idea is to provide more value add to the customer, create more non-price competitive advantage on the products we're working on and to help drive that growth and improve and lift the EBITDA margins. So all the ones that we've called out for new products thus far are destined to meet that target.

And on the capacity plans, the $1 billion or so, is the right way to think about it kind of your $200 million or so of growth, plus or minus, and $100 million or so of maintenance CapEx and some of the timing whether sites or other facilities, that's going to be kind of the determining factor.

I think that we talked a little bit. The numbers that I put out there are in addition to the normal maintenance replacement type CapEx. And obviously we plan to generate significant cash flow each year too. So we will have ample capital to do even more than what we're outlining here. But that's the distinction I would call to that one, Stanley. Mike, anything to add there?

No, that's exactly right.

And then last for me, call us a big focus kind of in this environment up and down the portfolio. Any ballpark on kind of what we should think on a cost out this year, or maybe how it manages on the SG&A piece, just trying to get a sense for kind of what sort of costs are going to be coming out over the next year, year and a half?

Yes, I'll start here, Stanley, and let Mike kind of finish up. But I think we talked about tying SG&A into our historical percentage of gross profit kind of metrics or sales. And then also Mike just called out another $20 million or so of opportunity, I'll call it, within the unfavorable variances. So I think those are two data points that I would say are important. Mike, what else would you add there?

Yes, Stanley, I don't have an overall target for you, but we'll be looking back at our SG&A relative to sales in unit volume, SG&A relative to gross profits. And we want to be able to get back to the types of levels we saw pre-pandemic. And so that'll be our focus, and I would expect you'll start seeing those improvements in 2025.

One moment for our next question. And that will come from the line of Jay McCanless with Wedbush.

Thanks. Good morning, guys. Thanks for taking my questions. So the first one, Matt, this expansion in Deckorators, even though you guys are still seeing negative sales trends in retail, is this more of a specific call that you think you have something in Deckorators that's going to be new and different to the market? Or is this a larger call that retail demand is going to start getting better from here?

Yes, I guess what I would say, Jay, is it's the former. We believe we have something special with our Deckorators, with our Surestone technology. It's the patented technology, and no one else has it. And for us, we see a tremendous amount of opportunities. And we think it's just the right time to really invest in those opportunities and help it grow even faster than originally scheduled. It's not a broader statement that the retail market's going to miraculously, it was a hockey stick up and to the right in the next six months, but long term, we still think it's going to be strong, but we expect our Deckorators brand to outperform.

Okay, that's great. Thank you. And then the second question I had, when you talked in the prepared comments about expanding UFP Construction, I guess, where are you going with this? And is it going to be in smaller markets or a larger geographic focus in parts of the country? Maybe walk us through where you're planning on expanding.

Sure, that's a good question, Jay. I guess what I would say is, we've been much more regionalized with our Site Built group. And so it's been primarily the non-urban Northeast, the Southeast Mid-Atlantic area, Texas, and Colorado. You'll recall many years ago, we exited California, Nevada, Arizona, the boom and bust type markets, we call them. And one of the things we're looking at is the demographic trends where people are moving to. It's creating a lot of opportunities. And that's where we're looking to head is, we're going to try to do a little Wayne Gretzky and go to where the puck going to be, not where it is right now. And so we see several markets that we're working on where they're getting an influx of residents.

That sounds great. And then the last question I had, Lumber, I'm like you, Matt. I think it seems weird that we haven't seen more talk of curtailments or plants reducing activity. I guess, how much longer do you think it takes till we start seeing some of that, especially if single-family starts to continue to kind of be a good, but not great type of market environment?

Yes, I think that as Kevin told me yesterday, I think the curtailments are going to be a little slower to develop. I think there's still capacity coming online, which is going to be new and modern and much more efficient. And so I would expect curtailments to happen in some of the older facilities. And I think right now everyone's kind of waiting to see who blinks first. But there will have to be curtailments unless demand picks up.

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, I'd like to thank you again for spending the time with us today. While the short-term outlook is full of potential changes, long-term, we remain on offense and committed to do, in the words of Imagine Dragons, whatever it takes to make our company more valuable. Thank you for your investment in us and we'll keep working to ensure great long-term returns. Have a great day.

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