Q3 2021 Ufp Industries Inc Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and welcome to the Q3 2021 USP.
P Industries earnings conference call at this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please.
Press Star Zero I would now like to hand, the conference over to your Speaker, Mr. <expletive> Coffee Air Vice President of corporate Communications and Investor Relations. Please go ahead Sir.
Welcome.
To UFP industries third quarter 2021 conference call.
The call today are CEO, Matt <unk> and CFO, Mike Cole.
Matt and Mike will offer prepared remarks, and then answer your questions. This conference call is available simultaneously and in its entirety to all interested investors and news media through a webcast at USPI.
Dot com re.
Play will also be available at that website through Friday October 22nd.
Before I turn the call over to Matt decide 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.
<unk> 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 our filings with the Securities and Exchange Commission.
I'll now turn the call over to Matt beside.
Thank you.
<expletive> and good afternoon, everyone.
We have been spouting superlatives for several quarters as the U S. P team makes a positive habit of breaking records.
Third quarter of 2021 fit sweetly into that pattern and exemplifies our 2020 one mantra, we will win.
The progress through the first three.
Quarters has been spectacular and I am continually amazed at the USP team.
On our team no one wants to be defeated.
And regardless of the obstacle or adversary, they just beat it.
So in spite of the lumber market drop of nearly 50% from the end of Q2, and the resulting margin degradation from.
Variable priced items, the strength of our diversified business model, which includes a diverse products and pricing models as well as diverse end markets brought us to record net sales and net earnings for the third quarter.
Some quick highlights for the record books.
Record net sales for the quarter were $2 1 billion.
Our record <unk> for the quarter was $196 7 million.
Record gross profit dollars were $327 6 million.
And record EPS was $1 93 per share.
And the first three quarters of 2021 represent the best year in.
But he has history for sales and profits.
As we.
Floor the segment results for the quarter, we will start with retail solutions.
Overall retail unit sales were down 1% from 2020 and profits were down from the record.
Set in 2020 as well as Youll recall the lumber market.
And our comprising in Q3 of 2020 and retail customer takeaways exceeded expectations.
2021 was a different story as retail demand was soft early in the quarter and the lumber market continued to fall dramatically.
So the pro would treated products in the sunbelt Spartanburg treated products were negative.
Negatively impacted through the quarter.
The higher lumber costs were absorbed in the quarterly profit numbers for the third quarter.
Unfortunately, the retail demand normalized.
In September and inventories are now more in line with the market.
So we expect the fourth quarter for this business to be more typical.
<unk> was UFP edge, our siding pattern and trim business unit, we will see more capacity come online in the fourth quarter and plans to expand sales when the capacity is available.
UFP edge also plans to add additional manufacturing and coating operations in other parts of the country.
Decorators has become the product.
Choice among retailers in Canada, and combined with U S awareness gives us confidence in the added capacity coming online in Q4 and in 2022, both in wood plastic composite and the patented mineral composite.
Decorators does continue to feel some of the impacts of higher RASM and transportation costs.
<unk> turns in Q3.
Handprint, the home and decor business unit continues to gain more sales volume with its cut to size product offering for building materials retailers.
Outdoor essentials has expanded its fencing range to include a variety of materials, including aluminum and composite.
It's planner.
<unk> and per the kids are also gaining traction.
Sales continue to climb through our e-commerce work on customer portals.
And our ecommerce team is adding a distribution facility in Texas to help accelerate our deliveries to customers around the country.
The overall.
<unk> outlook for retail is positive as our big box customers have a positive forecast for consumer demand both from DIY consumers as well as professional contractors.
UFP construction unit sales increased nicely in Q3.
And the site built arena strong single family residential demand continues in the geographic markets.
<unk> serve.
And multifamily remains resilient.
The new products from recent acquisitions, such as aluminum cladding and aluminum decks for multifamily and commercial projects have created opportunities in other geographic locations as we scale these new products.
Our trust facilities are operating near capacity with.
That's reasonable employees.
We continue to recruit and hire to fill additional shifts where possible.
Our factory built unit also improved as strong demand continues.
Factory built absorbed the market drop on inventory commodity items for our manufactured housing customers during the quarter.
With <unk> our team continues to invest in new product portfolio for the factory built market.
And in late Q3, the factory built team of UFP distribution closed on the purchase of shelter products in Alabama to expand its capabilities.
Unit sales to commercial construction grew from a year ago, but more importantly <unk>.
Yet again positive for Q3.
Our concrete forming business will consolidate the concrete forming related lumber and panel products sold through the retail solutions segment and bring more focus on converting customers to designed engineered and manufactured solutions.
Throughout the construction segment imported.
Bob was extra some projects have been delayed due to the transportation and port issues.
We are pushing for relief from regulatory restrictions, which limit transportation providers and cause unnecessary delays in the supply chain.
We also note that engineered wood products are still in short supply.
<unk> encourages more customers to use.
Prop custom built floor trusses or other alternative products.
UFP industrial grew unit sales through its acquisitions during the quarter.
The focus on value add versus commodity results in some sales loss, but better profitability.
Also new analytics help sales better identified.
Our crew costs to ensure we receive a fair price for the goods and services we provide.
The industrial team is investing heavily in automation material sourcing and recruitment as they continue to enhance the solutions offered to the customer.
The protective packaging runway is growing from a small base, but has a pipeline.
<unk> physician targets to serve as a beachhead from which to grow in scale.
And our international group posted excellent performance in the third quarter as Mexico continues to Excel and Australia adds additional products to rich mix.
Other areas. We are working on include better utilizing our size and strengths as.
In a vacuum.
We have seen the benefits of our purchasing team working effectively effectively with each segment and leveraging the raw material spend.
For 2022, we will extend this benefit to our MRO and supply spend.
As we have added acquisitions, we havent, yet taken full advantage of our buying power.
And we.
The company there is at least $10 million in annual savings available to us.
As we look at our human capital needs one of our top priorities is attracting and retaining labor.
We have seen an increase in applications after the extra unemployment compensation payments were stopped.
Yes, we still need hundreds of individuals who are willing to work hard.
We believe we have instituted incentives for referrals by paying existing teammates to identify recruit and onboard those individuals who can be successful with us.
Our HR teams and business operators have worked together to craft creative local solutions for the markets, where our facilities are located.
We are focused on training and creating opportunities for our teammates to move up in the organization.
Our unique UFP business School graduated its fourth class of business degree students in August.
And the class of 2023 is full and has a majority of low income individuals females and people of color.
We continue to share our success with our hourly production teammates who continue to do whatever it takes to serve our customers.
It will be receiving a record $13 $6 million worth of performance incentive payments based on the trailing 12 months performance.
That brings the year to date 2021 total of bonuses an increase.
And with its to nearly $24 million.
Of course, our strong focus on new products remains intact <unk>.
New product sales increased to $196 8 million for the quarter and $600 2 million year to date, well in excess of the year to date budget.
We have increased the breadth of products in each business unit.
Unit, but we need to be even faster to vet and bring these new products to consumers more quickly.
Of course capital allocation is a key focus we prioritize capital on strategic acquisitions, new products and services expansionary and efficiency capital expenditures and returned to shareholders.
Acquisition.
We expanded our strategic growth initiative as we pursue targets in each segment with an emphasis on scalable and synergistic new products or services complementary value added products and core competencies.
The pipeline remains robust.
We are.
<unk> capital commitments for expansion and automation and technology.
<unk> and expect that trend to continue.
Our investment in the innovation accelerators designed to speed and enhance the return on investment in new products.
We also plan to return capital to our shareholders, including cash dividends, which the board agreed to increase to <unk> 20 per share for the December.
<unk> 21 dividend payment.
We will also employ opportunistic share repurchases when appropriate.
On a positive anecdote based on the tremendous cash flow generation year to date, we have essentially covered the acquisition costs of pallet, one sunbelt in Spartanburg and have a strong cash position as of the.
2000 in Q3.
Now I'd like to turn it over to Mike Cole, who will provide more details on our financial performance.
Thanks, Matt and good afternoon, everyone. Our consolidated results. This quarter are highlighted by unit sales growth of 13% and adjusted EBITDA growth of 49% in spite of an unprecedented.
And a drop in lumber prices and softening of retail demand.
Operating cash flow of $282 million 97 million ahead of last year.
Our strong balance sheet with net debt to total capitalization of less than 9% and liquidity of $668 million.
And a trailing 12 months return on invested capital of over 20.
Net interest sent.
Now I'll review the financial statements in more detail starting with our sales by segment.
As we anticipated the retail segment had to fight through a combination of lower lumber prices and demand compared to the unprecedented highs in 2020.
As consumers shifted spending this year when pandemic related restrictions.
Six lifted and the economy reopened consequently organic unit sales dropped 19% in retail.
This decline was offset by the acquisitions of Sunbelt in Spartanburg, which contributed 18% to unit growth, resulting in a total unit decline of 1%.
Your organic unit decline was most in.
We're liberal in our <unk> business unit, which reported a 27% decrease.
We remain confident demand in this market will normalize in the near term for a variety of reasons and when combined with our initiatives to increase market share. We believe retail will be a strong contributor to our future long term growth.
Impact sales to the industrial market increased to 103% and consisted of a 69% increase in selling prices as we sold through our higher priced inventory and as we continue to improve our value added product mix and maintain pricing discipline.
Our unit sales increased 34% as a result.
Pallet one acquisition.
Organic unit growth was flat this quarter due to capacity constraints like the availability of labor and long lead times on equipment and as we continue to be selective in the business. We take in order to focus on higher margin value added products.
This sales strategy resulted in a strong improvement in.
<unk> of our profits, which I'll review shortly.
Share gains from new customers, new locations of existing customers and new products contributed $28 million $19 million and $20 million, respectively to our sales this quarter.
These gains were offset by the loss of unit sales to less profitable accounts.
Gross.
Finally, our sales to the construction segment increased 62% consisting of a 43% increase in selling prices and 19% unit growth, including a 3% contribution from acquisitions organic unit growth was driven by a 26% increase in commercial 23%.
And site built housing and 17% in factory built housing.
Demand in our backlogs of business in the construction segment continued to be strong, which we expect will continue.
Capacity constraints remain a challenge in this segment as well.
Moving down the income statement, our third quarter gross.
<unk> increased by $86 5 million or 36%.
By segment retail decreased by $95 million, primarily driven by our pro with Sunbelt in Spartanburg operations.
As I mentioned last quarter, we expected that our commodity based products sold on a variable price would be adversely impacted by the.
Prime lumber prices, we anticipated during the quarter.
The decline in unit sales also adversely impacted our production cost per unit.
Fortunately the increases we expected in industrial and construction also occurred in these segments contributed $78 million and $92 million, respectively to our gross profit growth.
Fine.
Each of these segments, which primarily sell value added products sold on a fixed price benefited from the drop in lumber prices organic growth and operating leverage also contributed to the gross profit increase in construction, while favorable changes in product mix contributed to the increase in industrial.
<unk>.
Acquisitions added $22 million to industrial gross profit and $1 million to construction.
Our retail segment lost $7 million of gross profits on our sunbelt in Spartanburg operations due to due to the drop in lumber prices.
Continuing to move down the <unk>.
Even our SG&A expenses increased by almost $35 million, consisting of $14 million from recently acquired businesses and $11 million.
Increase in incentives and an $8 million increase in wages and benefits. The remaining remaining increase is primarily related to higher travel costs.
Sequentially, our SG&A dropped from $185 million in Q2 to $170 million in Q3, primarily due to a decrease in bonus expense.
Finally, our operating profit increased nearly $62 million, which was comprised of a $48 million increase in industrial a 68 million.
Secrease in construction and a $10 million increase in international offset by an $88 million decrease in retail Act.
Acquisitions contributed to operating profit of $14 million to industrial and a loss of $12 million to retail.
Moving onto our cash flow statement our COO.
Cash flows generated from operations for the year was $282 million and consisted of net earnings and noncash expenses totaling $474 million compared to 245 million last year and $192 million increase in net working capital since year end compared to $60 million increase in.
And in Korea.
We anticipate further decreases in working capital through the balance of the year, assuming lumber prices remain at current levels and as we move into what is typically a slower time of the year for most of our business units.
We measure our cash cycle to assess our working capital management.
It increased to 57 days this year compared.
The prior three days last year, primarily driven by an increase in our days supply of inventory due to lower retail demand and our customers anticipated for our inventory planning.
Our investing activities included capital expenditures totaling $110 million, including expansionary and efficiency capex of $60 million.
We're now planning for total capital expenditures for the year of $147 million.
Notable projects include expanding our capacity to produce a mineral based in wood plastic composite decking products and our UFP edge siding pattern and trim products, expanding our machine the pallet capacity and taking advantage of automation.
To 40 opportunities.
We also invested $433 million on previously announced acquisitions.
Lastly, our financing activities included two.
$28 million of dividends paid this year at a rate of 15 cents a share a 20% increase in the rate over last year.
And our board approved in <unk>.
<unk> on our fourth quarter dividend to <unk> 20, a share reflecting our confidence in the business outlook.
With respect to our balance sheet at the end of September our total debt net of cash was $182 million and our total liquidity was $668 million consisting of cash.
Increased $128 million and $540 million in availability under our revolving credit facility.
We expect further reductions in our net working capital investment as we work through the balance of the year, resulting in favorable cash flows.
The strength of our cash flow generation and balance sheet provides us.
Cash a plenty of capital to grow or to return to shareholders. Our highest priorities for capital allocation are currently capital expenditures and business acquisitions based on opportunities and the strength of potential returns we see.
That's all I have in the financials Matt.
Thank you, Mike now I'd like to open.
Turn it up for questions.
Thank you Andrew reminder, to ask a question you will need to press star one on your telephone.
Sorry, Your question press the pound key please standby, while we compile the Q&A roster.
Our first question will come from Keay, <unk> with BMO capital markets.
US with please go ahead.
Thank you Ryan and good afternoon, and congrats once again, Matt and Mike.
Thank you Adrian.
Our first question starting off on the composite decking side.
Can you talk about.
The demand trends at USC.
Dan.
I see that in the third quarter.
I think volumes were down 14% year over year.
Can you talk about what you are seeing on the demand side.
Yes, I think the demand is still very strong even in terms of our manufacturing facilities that are both at capacity in there.
<unk> sold out now through the end of the year.
I think the future on that still looks good from what we can see and in conversations with our retail customers. They are still very bullish on both wood plastic composite and especially the mineral based composite.
Okay, and Thats what drove the euro.
Both the drop in demand in the third quarter was it.
Seasonal element.
Is it sort of people are just being out for vacations and just curious.
I think some of it was just.
If you talk about what we talked about at the end of the second quarter was perhaps with some people who had been basically kept at home for a year.
Yes.
Time off and spend money on vacations and other things that they couldnt do for that period of time I also think there may have been more inventory in the pipeline earlier in the year because of ordering so.
The big boxes had plenty of stock.
So that may be part of part of the decline in the third quarter as well.
And I think that's right I would point out that.
Year to date, so for the full.
Nine months decorators is up 14% I believe.
On a unit basis.
Got it and so at this point, you think sort of inventory in the channel has come down to normal levels.
Well composite decking side.
Yes, I really can't speak to the whole composite space, but I can only speak to our portion of that space.
On the demand that we're seeing and the fact that we have orders through the end of the year and extending beyond that.
That bodes well for us.
That's helpful and then turning to the site.
Maybe talk a little bit about kind of what you are.
Seeing in terms of demand and are there any particular.
Regions that you are seeing more strength versus the others.
Yes, it's a good question Keith.
Got it and just as a reminder, we don't have facilities all over the country, we tend to be more regional so then.
Both East, Texas, Colorado, and non urban northeast is where we're located those areas. All all seem to be very strong demand is strong our facilities are running at capacity.
And again as I mentioned.
For as much capacity as we can produce given the number of employees were able to obtain.
I would say that.
Typical seasonality would occur in say upstate New York, we would expect that to happen but.
Other than that again demand is very strong in order files are are well.
Past into the future.
Got it that's helpful I've done it over good luck.
The back half of DRAM into 2022 thank.
Thank you Kian.
Thank you. Our next question will come from Stanley Elliott with Stifel. Please go ahead.
Hey.
We thank you all for taking the questions and also thanks for the additional information in the release very very helpful.
Can you talk a little bit about what youre seeing from your customers with the supply chain.
Do they have any thoughts on when all of this might get cleared up.
And is there any way.
Hey, everybody kind of what sort of impact it's actually having on your business now.
Industrial or even the construction side.
Yes, that's a great question Stanley I think you'd probably get just about the same number of answers as the number of people you asked that question too.
Okay.
Conversations that.
To frame add with our customers as there are certain products that just don't seem to be freeing up anytime soon and there's others, where they see the light at the end of the tunnel.
For us since most of our products manufactured domestically that that.
It tends to help us, but our customers that are waiting on parts or waiting on electronic devices or chips or other things.
That I have that.
It's a kind of a wait and see game one of the positives, though that I think has happened is that it is.
Going to extend this period of what I'll call a recovery because they haven't been able to build everything that they wanted to build in the demand still appears to be there. So.
The demand should continue on maybe at a slightly lower.
Things like Holden historical but.
Still very good for us.
Perfect and then the new products that you guys have I mean, you've blown through your initial target already are very strong.
What has changed in the process, whether its the development as a consumer feedback on the front end.
Just trying.
Lower light a better feel for why Youre, having such great success there.
Yes, I really have to give credit to the team.
All of the different business units have really put a focus on driving new products and driving new services.
They've made investments in it and we all know how important it is to our future to come up with new things. So.
Trying to get really done an incredible job of embracing that and turning it into real positive gains.
In terms of some of the sales dollars just keep in mind that some of those items that are in there.
The higher cost number in them, so that may give us slight head fake to the dollar amount.
Fair enough and then lastly for me.
And a nice boost on the dividend.
I apologize if you feel centered on other calls how should we think about that in terms of is there a percentage that you're targeting payout.
Payout wise versus net income or any any sort of metric to think about.
Yes, I think for US, it's really just about making sure we balance that.
The shareholders kind of currently where the long term growth value.
I don't think we've really set a specific target that we're looking at but.
Mike you can add some color to that as well.
At the at the.
Annualized at 80 cents.
That's 13%, 14% payout ratio of net earnings very comfort.
It returns.
We also look at yield to some extent and yield.
Yield based on.
Where we think a reasonable valuation for the company would be so those are the metrics we look at.
<unk> was oh.
A nice increase for us.
We can support very easily going forward.
Absolutely. Thanks, guys very much I appreciate it and best of luck. Thank you.
Thank you. Our next question will come from Ruben <unk> with the benchmark company. Please go ahead.
Thank you good afternoon everybody.
David.
Maybe.
Or going back to the retail side for a second.
Couple of follow up question. So one I think it was pretty widely reported that there was maybe.
At least on the DIY side, a slowdown earlier on in the quarter.
More recently pricing seems to be moving higher have you seen.
The trends on the demand side improve or do you think that that the inventory situation just kind of.
Balanced out and now it's just kind of normal course of business or is it supply chain driving the price itself. What do you think it is.
Or can you just talk about maybe the last 456 weeks relative to what you saw earlier.
Earlier in the quarter.
A lot of questions in one statement.
Sorry, all of them.
So.
As we look at it I think youre, absolutely right I think that the slack demand and kind of early Q3 has moderated and now I think it's kind of back to what we see is more normal.
Do think there was excess inventory in.
Supply chain.
I know there was some shutdowns by mills for maintenance and other things so very very judiciously used in probably the right thing for them to do.
And again I think we see still see a good demand there probably are some transportation related impacts that certainly would encourage people to make sure they have inventory on hand, but.
But I think everything is kind of balanced out and if I as I mentioned in my remarks, if we kind of look at the fourth quarter I'd expect it to be a little more typical.
For for previous years.
Perfect and.
Then on the industrial side is it too early.
And see the benefits.
Our cross.