Q3 2022 Ufp Industries Inc Earnings Call

October 20, 2022

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Okay.

Good day and welcome to the Q3 2022, 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 to ask a question. During the session you will need to press star one one on your telephone you will then hear an automated message advising that your hand is raised.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker, Mr. <expletive> Coffee Air Vice President of Communications and Investor Relations. Please go ahead Sir.

Welcome to UFP industries third quarter 2022 conference call hosting 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 a replay will also be available at that web site.

Before I turn the call over to Matt <unk>, 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 1095.

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 <unk>.

Thank you Vic and good afternoon, everyone. Our top stories this week the Padres Alfred the Dodgers. The Buffaloes won their first game and Tennessee upset Alabama here.

Huge surprises all that some gamblers might love.

Meanwhile, its never a gamble to expect the USP team to work together to commit to excellence and to serve our customers to achieve a new record for sales and profits in the third quarter.

And with trailing 12 months sales of $9 7 billion.

Just short of our long term target of $10 billion in sales.

Since we plan to stay on offense, we will need to formulate new goals for 2023 and beyond.

I am extremely proud of the USB teammates, who love a difficult challenge and historically exceed the target.

In fact, we built this company the challenge with the conventional wisdom and to prove doubters wrong is over our history. We have found ways to perform in spite of obstacles in our path.

We have simple goals that USP, we don't have mission statements, Jeff people on a mission.

Which is to provide a strong return on investment to all of our shareholders.

The fact that thousands of our teammates are also shareholders keeps us all aligned in that goal.

Our diverse end markets and balanced business model provide protection from market fluctuations and also reduce the impact of slowdowns in a single market.

Over the last several years, we have steadily created more value with new products and services and more efficient operations are.

Our objective continues to be to expand innovation and move further up the value chain as we evolve from a product seller to a solutions provider.

We focus on helping ease of customer challenge by providing a solution, which is a better value both for the customer and for us.

Achieving this goal of not only makes our performance better it makes us more resilient in difficult markets.

Our long term target is to consistently exceed an adjusted EBITDA margin of 10% and.

In our third quarter performance once again demonstrates that this target is not just attainable, but repeatable.

By working together with our customers to provide win win scenarios. We also plan to improve areas, where our returns are lagging.

Now, let's look at third quarter results as well as some examples of our progress towards our goal.

Net sales for Q3 were $2 3 billion with units up a modest 5%.

Net earnings were $167 million for the quarter and diluted EPS was $2 66.

Up 38% over the third quarter of 2021.

Mike will fill you in on the rest of the financial information in a moment, but I would like to review the segments, starting with retail solutions.

As expected <unk> retail solutions.

Perform much better in Q3 than a year ago.

The promo and sunbelt teams reflected this trend despite having challenging cost increases that were not recouped in the third quarter.

And as we say we cannot afford to work for practice, especially in this labor and cost environment. So the retail team has been working diligently to pass along these increases in order to achieve a fair return.

We expect to see cost increases come through in Q4 and recognize that we may lose some unprofitable business in the process.

The promo at Fr fire retardant sales <unk> seen 27% unit increases from our internal capacity additions and in 2023, we will have a fully integrated fire retardant treating system using our own PFS proprietary chemicals.

And as chemical transportation and labor costs continue to rise that will be important for us to stay ahead of the pricing curve.

It is helpful to note that the customer market for treated lumber is surprisingly an elastic as demand during the pandemic show that consumers are willing to pay higher prices than previously thought.

Decorators continues to increase capacity as the newly installed equipment is up and running both for wood plastic and mineral based composites.

Because we primarily self distribute we haven't incurred the volume decreases from channel Destocking that some of the larger companies in this space have endured.

Our <unk> acquisition earlier this year it is helping our wood plastic component composite operations achieved a 90% plus recycled products content on our newly installed equipment.

We look forward to further improvements in more scalability of this operation.

And our mineral based composites operations are using nearly 50% recycled materials and we expect to be able to grow that to over 75% over the next 18 months.

Our new unique aluminum rapid rail pre assembled deck railing products will roll out in February 2023, and.

And decorators continue to customer and market acquisition efforts by adding distributors in the UK and in France.

Moving to construction construction had an incredible quarter for the <unk> business unit performing exceptionally well.

Our western facilities have seen a slowdown from recent overcapacity situation and with higher interest rates. Some single family customers are beginning to cancel orders as buyers get priced out of the mortgage market.

However, our balanced in our markets between single and multifamily, which continues to perform well as well as growth in our alternative materials, such as steel and aluminum will continue to bring strong results in line with more typical housing markets.

Unfortunately, as I feared the fed appears to be impatient with its approach to rate changes not allowing them to work through the system before adding additional hikes using.

Using leading indicators instead of lagging ones may help affect a softer landing and we will watch these moves carefully and adjust as needed to meet customer needs and continue to add more value.

We still expect at least single digit percentage declines in housing starts over the next two years.

With our business model and our geographic locations, which tend to be in areas, where long term growth as expected.

This level of activity will still result in very good performance on our side of the business.

Factory built remained strong and the affordability that factory built homes provide makes it an attractive option with rising interest rates and inflation.

The affordability of factory built will be sought after attribute and adding the hurricane and rebuilding efforts.

We expect a significant lift from these sales in Florida, and Georgia over the next 18 to 24 months.

Concrete form is forming services demand is solid and we expect seasonal slowdowns in those areas of the country that can build year round.

Value added sales increased to 48% during the quarter.

And we have not seen yet seen any significant activity from infrastructure spending within the concrete forming group. Although we are optimistic that that will be forthcoming.

And the efforts to improve financial and operational performance in the commercial construction area are being well executed and they operated at a functional capacity in Q3.

We expect to see a typical seasonal slowdown in Q4, but remain optimistic for continued improvements in 2023.

Moving on to UFP industrial with the exception of the slowing in the southwest machine belt pallet demand is strong.

Material is becoming more available while labor and freight costs remained challenging.

Pallet, one continues to perform well as expected and is executing its strategy to improve sourcing manufacturing and expanding geographically within the U S footprint.

The recent combination with Dempsey forest products provides additional opportunity to create efficiencies in the supply chain.

On the structural packaging side, our national sales team continues to gain business with national accounts.

Some customers' businesses have slowed somewhat while others remained strong.

And we are gaining customers as well as gaining efficiencies in manufacturing.

The supply chain overall is improving which helps us reduce lead times.

Our outlook remains positive given our very diverse end markets in the industrial space, which provides consistency and stability.

And the USD packaging, we have seen a slight weakening of demand in certain end markets as the generally mirror, our overall customer mix in industrial we still see very strong growth opportunities in this business unit.

On the international front, the packaging solutions business operations in Australia, and India continue their solid performance.

Mexico has performed well in the housing related products will likely follow the housing market is it changes in the U S.

Europe is being impacted by the one Ukraine as energy prices and raw material supply from the eastern Bloc countries present headwinds, although their results are not material to our overall company performance.

And purchasing and transportation, we're seeing a less volatile more normalized lumber and panel market in the near term and watches mills managed supply to demand levels to protect their margins.

Our internal transportation costs have increased due to fuel labor and regulatory regulatory cost increases and while fuel prices briefly retreated in Q3, they are back at or near record highs. So we expect cost to continue to rise with inflation.

Enabling more oil and gas production domestically would certainly help both with energy costs and with inflation.

These cost increases are crippling the budgets of our hourly teammates with inflation offsetting pay increases in bonuses and Unfortunately. These are all avoidable with more reason to policy.

Overall inventories are high as delayed shipments continued to arrive while customer orders in some areas have fallen short of expectations.

We will work this excess down while also looking for opportunities to stock up for 2023.

Rail has been and will likely continue to be a concern through the third quarter and possibly the fourth labor and equipment shortages are still a challenge for our carriers.

But in order to enhance our own transportation capabilities, we are strengthening our USP transportation company to add more capabilities internally and more efficiency for our transportation needs. We are very excited about improving the profitability of this business unit moving forward.

New products for the quarter were $178 million and are now $564 million year to date.

We are seeing new products come through our innovation accelerator.

And we are exploring intellectual property technology and process improvement acquisitions and ventures through our newly announced innovation fund.

Which again is designed to acquire new products at an earlier stage of development and enable faster commercialization and scale.

We're committing to this disrupting our own businesses before others do by developing our own unique intellectual property, ensuring us a more profitable place in the value chain.

On the labor labor supply in many areas has recently begun to loosen the demand for labor contracts, we will be better able to utilize our existing and available talent and reduce our dependence on temporary services.

We are very pleased to announce our third quarter profit sharing payments at a record of $21 2 million, which will be paid to our hourly teammates in November . This represents a 54, 7% increase over 2021.

This profit sharing bonus is in addition to the hourly bonus which will be paid in March of 2023, as we share successes with all of our teammates.

We will face current and future hurdles in the economy head on by staying on offense and keeping our focus on protecting and enhancing long term shareholder value.

Marrying together the effective allocation of capital with an experienced and dedicated management team is the cornerstone of our company.

We prioritized capital on growth, creating long term value and providing a solid return to our shareholders.

Our growth capital is directed to strategic acquisitions, new products and services and expansionary and efficiency of capital expenditures.

We have plenty of acquisition targets in the pipeline, but we'll keep our disciplined approach and adjust our model consistent with our view of the future.

We have a great supply of dry powder to take advantage of opportunistic situations as they occur in our targeted runways.

In addition to new products and services in all business units, we see opportunities with our industrial growth as we pursue our goal of becoming the global packaging solutions provider.

We will continue to scale, our recent acquisitions across our network.

Our return on capital to shareholders phase III forms share repurchases cash dividends an increase in share value.

In addition to share repurchases, we believe that consistent and growing dividends add value to our shareholders and we are very pleased to report that our board just authorized a dividend of <unk> 25 per share payable on December 15 to shareholders of record on December one.

This payment of 67% higher than the <unk> 15 per share paid in December of 2021.

While the demand for capital is high we will remain thoughtful in our approach and stay true to our return on investment focus.

Now I'd like to turn it over to Mike Cole to share more information.

Thanks, Matt and good afternoon, everyone.

Our consolidated results this quarter highlighted by a 5% unit growth, including 3% organic with all three of our segments reporting unit growth.

A 46% increase in adjusted EBITDA and related margin expansion of 280 basis points to 11, 8% due to gross margin improvement.

$535 million of operating cash flow up $253 million over last year, resulting in a strong balance sheet with nearly $1 5 billion in liquidity and no net debt.

And a healthy trailing 12 months return on invested capital of 35%.

Now I'll walk through the financial statements for the quarter in more detail starting with our sales by segment.

Sales to the retail segment increased 21% consisting of a 15% increase in selling prices and a 6% increase in unit sales.

Acquisitions contributed 3% to unit growth.

Taking into account the transfer of certain product sales from our retail to our construction segment, our organic unit growth this quarter was 5%.

As expected our unit sales comparisons this quarter were more favorable.

As our <unk> sunbelt edge and decorators categories, each experienced strong year over year organic unit growth.

These increases were offset somewhat by decreases in hand print and outdoor essentials as customers reduced orders to address higher inventory levels.

Sales to the industrial segment increased 2%, primarily driven by acquisitions, which contributed 3% to unit growth and pricing, which was up 1%.

Organic organic unit growth dropped by 2%.

Consistent with prior quarters, our organic growth was impacted by capacity constraints and as we continue to be selective in the business. We take in order to focus on higher margin value added products.

This strategy continues to benefit our gross profits and margins, which I'll review shortly.

The bridge of our change in organic unit sales include gains from $12 million in sales to new customers $22 million of sales to new locations of existing customers.

And $12 million of new product sales.

These gains were offset by declines in sales on other accounts as a result of the factors I just mentioned.

Our sales to the construction segment increased 8%, primarily due to 6% organic unit growth and the transfer of certain product sales from retail.

Organic unit growth was driven by a 36% increase in each of our concrete forming and commercial units and a 9% increase in factory built housing.

As you would expect with higher mortgage rates consumer demands for site built.

Housing began to soften and our unit sales to those customers decreased by 7%.

Moving down the income statement, our third quarter gross profits increased by $123 million or 37% and outpaced our 5% increase in unit sales as our profit per unit improved.

New products and enhancing our mix of value added product sales to total sales continue to be key strategies to improve margins across all of our segments.

An increase in new product sales contributed $10 million to gross profits and gross profits on value added product sales increased by $63 million for the quarter.

By segment retail gross profit increased by $67 million or 615% year over year.

As expected pro and Sunbelt units were well positioned for improvements in gross profits in Q3, given their inventory positions at the beginning of the quarter and more favorable trends in lumber prices than we experienced last year.

We also experienced gross profit increases and decorators and edge.

Construction's gross profit increased by $46 million or 30% led by a $39 million increase in Southfield, and a $6 million increase in our commercial business unit.

You added product sales increased to 81% of total sales this year from 74% last year and the construction segment.

Industrial's gross profit increased by $17 million or 14%, primarily due to our value added.

These value based selling initiatives and more favorable changes in product mix, including new products.

Value added products increased to 74% of total industrial sales this year from 69% last year.

Continuing to move down the income statement.

Our SG&A expenses increased by $45 million, including nearly $5 million from recently acquired businesses.

The remaining increase consisted of a $20 million increase in accrued bonus expenses.

And other incentives tied to profitability.

$7 million increase in bad debt expense of $4 million increase in wages and benefits.

The $3 million increase in amortization expense and a $2 million increase in travel related expenses.

Sequentially, our SG&A decreased slightly from a $215 million in Q2 to $214 million in Q3.

Finally, our operating profits increased by nearly $69 million driven by a $55 million increase in retail of $26 million increase in construction and a $7 million increase in industrial.

The decline in the corporate segment is primarily due to a $9 million gain on the sale of real estate, we realized in Q3 last year.

Moving onto our cash flow statement, our net cash flows from operating activities for the year to date was $535 million and consisted of net earnings and noncash expenses totaling $687 million compared to $474 million last year.

And $152 million increase in net working capital since the end of last year compared to $193 million increase in the prior year.

We measure our cash cycle to assess our working capital management and a decreased to 55 days this year, which is consistent with our historical experience and two days lower than last year, primarily due to a decrease in our days supply of inventory.

Our investing activities for the year included capital expenditures totaling $115 million, including expansionary and efficiency capex of $52 million.

Extended lead times on most equipment in rolling stock may cause us to fall short of our plan of $175 million to $225 million of Capex for 'twenty 2022 as delivery of some of these items is pushed to 2023.

And we invested $101 million on previously announced acquisitions.

Finally, our financing financing activities for the year included $43 million in dividends and $93 million of share repurchases.

With respect to our capital structure and resources at the end of September we had $135 million net surplus cash compared to $109 $82 million and net debt last year.

And our total liquidity was nearly one 5 billion consisting of surplus cash of 460 $456 million and availability of $536 million under our revolving credit facility and $500 million under our shelf agreement with certain lenders.

Now I'll finish up with comments about our capital allocation plans the.

The strength of our cash flow generation and conservative capital structure provides us with plenty of capital to grow our business and also return to shareholders. We continue to pursue a balanced and return driven approach approach across dividends share buybacks capital investments in M&A, specifically our board just approved another quarterly dividend of <unk> 25.

<unk> <unk>, a share representing a year over year increase of 67%, reflecting confidence in our future business outlook.

We continue to consider our payout ratios and yields in determining the appropriate rate and are pleased once again to raise our year over year dividend.

So far for the year, we've repurchased one 2 million shares of our stock at an average price of $77.

We have remaining authorization to repurchase up to an additional $1 4 million shares through the balance of the year and we'll continue to do so at times when the price hits, our pre established target.

Moving on to growth investments capex is likely to be at or below the low end of our targeted range of $175 million due to the extended lead times I mentioned earlier.

Priority continues to be given the projects that enhance the working environments of our plants take advantage of automation opportunities and drive strategies that have long term strong long term growth potential of new and value added products.

Lastly, we continue to pursue a healthy pipeline of acquisition opportunities with companies that are a strong strategic fit and enhance our capabilities, while providing higher margin return and growth potential.

So I have in financials Matt.

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

Thank you as a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.

Okay.

And today's first question will come from Keaton, Ma'am <unk> with BMO capital markets. Please go ahead.

Thanks.

Good evening, Matt and Mike.

Thanks, Jason.

Yeah.

On the retail side.

Can you talk a little bit about.

How does the demand trended through the third quarter are there any product categories.

Demand.

Well, it's kind of more resilient versus.

Product categories Vegas saw activity start to ease.

Yes, Keith I don't know that I have the granular granular detail on that I know that there was a little bit slower at the start of the third quarter, but it got to move back to what I would call a typical seasonal demand. So it would be more typical years prior to the pandemic and that's what we've seen overall.

All there hasnt been a specific product category I know, we had some some discussion about fencing at the end of Q2, but I don't I don't see that there is a particular product category of any significant scope for us.

Drastically different from what the overall general.

The trend has been.

Okay.

That's helpful and then switching to the inventory side again with retail.

Our focus.

Have you seen kind of many other building product categories.

Inventory destocking.

Can you comment at all you talked about.

About decorators any prepared remarks, but in general.

We're seeing more tenured partners, becoming more conservative in terms of how they manage inventories.

Can you talk about sort of what discussions you are having with the or kind of channel partners.

I think about 2023.

Sure, Yes, I think.

Part of it is trying to figure out the conservative piece I think Keith you're referring to is.

Certainly on the independent side, they don't want to stock a bunch of different inventory items and.

In composite decking tends to be one of those categories, where you have multiple lengths in sizes and colors.

It's very difficult for them to stock a whole lot of that and I think thats one of the things youre seeing in the Destocking in some of the other competitors areas.

We self distribute in.

We're able to move product around a little easier than I guess most.

That's less of an issue for us I think overall.

The customers that we have on the big box side are still very optimistic for 2023.

In there.

Probably not looking at any increases over 2022, but theyre looking at pretty solid performance. So.

From our standpoint.

No real change in how they are doing it all they tend to make different buying decisions at different points in time in the year. So it tends to be a timing issue as opposed to an overall annual issue.

Got it okay. That's helpful I'll jump back into queue.

Thank you.

Thank you one moment for our next question.

That will come from the line of Reuben Garner with the benchmark company. Please go ahead.

Thanks, Good afternoon everybody.

Hi, Reuben.

So maybe a follow up on the retail to start.

Our retail segment.

In the release you mentioned you would expect.

Continued.

To expect more normalized.

Demand.

So can you help us I mean, the third quarter I think the revenue number was something like $850 million I know when you are talking about demand youre talking about unit.

Volumes, but with so many moving pieces that might help if you could kind of walk us through I guess in the third quarter, where the units pretty well normalized and we just need to make the pricing assumption for Q4 and beyond.

First off and then I have a question on the margin as well.

Yes, so the units I think youre looking at exactly right Rubin.

Basically say the units are for third quarter, or what I would say a fairly typical of what we'd expect and you have to make your pricing assumptions.

And apply those to the units.

Okay, and then the <unk>.

One is kind of tied into the pricing so last year big margin hit in retail in the third quarter.

The pricing.

Just directionally has been pretty similar this year and that you started the year at a high level and it fell through the year, but your gross margin performance was much different is there more margin pain to come from the price declines or were you guys just able to handle it differently. The speed of the decline was different can you just talk about the retail margins.

Mike.

Yes, just big picture, let me just chime in on that I want to get.

A credit to our purchasing teams and our operations teams for Hale BOPP material differently in 2023 versus or excuse me 2022 versus 2021, so they deserve an awful lot of credit for how they time that goes by that help on.

On the purchasing side and then on the operation side, how they manage the inventory.

Helped ease some of the pain that could have easily been suffered again in 2022, but because of the way to handle that they did a really nice job.

And Mike can kind of tie in to the margin piece of that you described the markets through real well and they were very similar but the timing is a little different so.

Last year.

Prices ran longer and were up for most of Q2.

And then they dropped in June pretty severely and they continue to drop through July and into September . So we ended up taking taken out of pumps. We took most of those lumps in Q3 last year in retail this year was different.

Prices started falling much earlier, and we took most of our lumps in Q2.

We enjoyed a pretty good Q1, but when prices fell in Q2, that's when we took our lumps in the market has been more stable I guess I'd say in Q3 this year and that's that's why the improvements so similar markets directionally, but the timing is a little different.

Moving into Q4, and yet prices now seem to be pretty pretty normalized and last year, we had a little bit of a run up in prices in Q4, so that could be a difference for this year, we will see.

Okay, perfect and I am a sneak one more bigger picture question and if I could so.

You guys have talked a lot. The company has a history of operating profitably and a lot of different economic environments.

I don't hear you guys talking or see any signs of any kind of cost cutting in any of the businesses right now in this kind of what seems to be.

Somewhat concerning macro backdrop can you just talk about what you guys are seeing or how youre thinking about it there is the company just positioned differently today than it's been in the past and you don't necessarily need to is it too early or I guess just walk through your thought processes.

Sure.

The company is definitely different than we were during that.

What is called the great recession.

And I think we're much more resilient as I mentioned earlier because of the model. We have I think the other part of it Rubin as our our management team and our leadership team. They take actions on a regular basis to make sure that we're staffed appropriately for the capacity we need in for orders.

So this is a constant thing with us it's not.

We never want to have another big event and.

Hopefully that doesn't happen what are the economy falls out of bed, but.

Our leadership team like I said, our management team at all of our locations. They have authority and they are very quick to respond to conditions in their markets. So it's not something we need to spend a lot of time or focus on and that will adjust as needed and that's kind of the beauty of the variable cost of our overall struck.

<unk>.

Great. Congrats on another strong quarter, guys and good luck going into the end of the year.

Thank you.

Thank you one moment for our next question.

And that will come from the line of Stanley Elliott with Stifel. Please go ahead.

Hey, Matt Mike <expletive>. Thank you guys for the time Hope you guys are all doing well congratulations.

It.

Industrial piece, you all mentioned kind of PMI and GDP is drivers.

Things seem to be hanging in here right now, but obviously you'd look to be slowing into next year. If you read some of the forecasts out there.

I'm curious you guys have made a lot of expansion into new products, you've expanded the portfolio do you think.

Think that this business will really track like PMI and GDP do you think you'll be able to outgrow. It just curious how youre thinking about all the moving parts there.

That's a great question Stanley I think.

Our plan would be to outgrow it because we want to be able to continue to take share.

So.

I think if you just want to look for markers in terms of what the overall market going to look like Thats why we put those data points and therefore, you to consider but yes. So I think the way that we're going about it and the outstanding job that the industrial team has been doing.

By selling solutions, and creating mixed material products for the customer base and adding those new products you mentioned.

That should allow us to grow faster than the general overall market and that's our plan.

And switching gears on the Capex piece, you mentioned kind of at the lower end or below in Thanksgiving.

Things getting pushed I mean, do you think that the.

Condition to get any better in 'twenty three.

If so then do you expect kind of like an outsized catch up year in 'twenty three with from a capex standpoint.

I know you guys have a lot of automation projects et cetera going on I'm, just curious how to think about that versus the cash flow.

Yeah, I'll kind of address.

The supplies part of this situation I think that the supply chain will ease up in 'twenty three so it'll be a little easier to get things more quickly and I think we're in the midst of our budgeting process for 2020 through Capex. So I don't know Mike If you have anything directionally to add in terms of the amounts yet.

We don't have any amounts necessary to provide at this point, but I'd say the appetite for capital investment is behind us and we still have.

Strategies, we're looking to drive and the machine build pilot side in the structure.

Packaging side protective packaging materials.

Well as other strategies within the construction and retail segments. So I think the appetite is going to be high and the challenge with this we continue to work through the supply chain.

Sounds great guys. Thanks for the time and best of luck.

Thanks, you bet. Thank you one moment our next question.

That will come from the line of Kurt Yinger with D. A Davidson. Please go ahead.

Great. Thanks, and good afternoon that Mike.

Alright character I just wanted to start out on the site built business and I was hoping you could talk about where backlog stands today relative to maybe three to six months ago and Matt I think in the prepared remarks, you talked about a little bit of weakness in the west.

Is that cancellation dynamic something that's pretty isolated at this stage or do you think that's going to spread to some of the other regions over the next few quarters.

That's a great question, Kurt I don't really have an answer for you I guess, what we can tell from what our customers are telling us and some are committed to continue to build.

Others are taking a slightly different approach and I think.

The tough part for anyone to measure is while there's contracts out there which are included in the backlog, which was part of your question.

Interest rate.

Hikes can definitely take people out of that mix.

So further interest rate hikes and mortgage rate increases will take more people out.

Will force more cancellation, so I, just I want to make sure that that's clear out there we have no insight into that particularly but.

And again, we've had markets that were extremely overheated. So there by slowing down somewhat there just getting back to what I would say it again more normalized level. If we think about it in terms of <unk>.

One three to $1 35 million starts for next year.

The balance we have both in single and multifamily enables us to attack both of those markets.

And we still believe there is a need for housing it's just how much impact rate hikes have.

Right right, Okay that makes sense.

Mike I think you mentioned that site built gross profit was up almost $40 million this quarter despite units being down 7% I mean, given the softening that we're seeing are you starting to see that weigh on pricing power and by extension the margins you expect to roll through that business.

Or I guess any thoughts around that dynamic over the next couple of quarters.

Yes.

That's our expectation that at some point that does have an impact on pricing depending on the magnitude of the slowdown.

And it's when you think about the.

The increase in gross profit it has two components right. So it's one is pricing generally, but it's also a lumber market trends and so the cycle there it is.

It's more of a fixed price products, so as lumber prices fall and you have your prices fixed and so you get to the next reset point.

Have enjoyed that benefit for for a couple of quarters now so there is that as well.

Got it and so presumably.

Q4, we see a more stable lumber market at least that component I guess, the pricing and margin story, probably will come out.

Yes, that's exactly my point.

Okay cool.

And then just switching to industrial I mean, you've been talking about it for several quarters now, but theres been a lot of noise around lumber pricing could you maybe just give us a few examples of the value based selling initiatives you've referenced in and how much opportunity do you feel like is still there ahead of you versus.

Improving mix and moving up the value chain.

Yes.

Happy to share some examples without giving any customer names but.

What we've seen is a.

Multi <unk>.

Factor approach. So as you look at certain customers that we may have been selling over in one part of the company.

Being able to have one of our industrial.

Engineers and specialists go in with our sales team and solve a problem for one location of that customer.

Been able to expand that to all the national locations at that customer.

<unk>.

Pallet, one that acquisition has been working very very well with our team and they have been able to share different customers and provide additional solutions that neither one of US was provided before.

Then on the mixed materials side, it's just the whole design and engineering, we've talked a little bit about our strip pack product, but coming up with better solutions that are less expensive for the customer, but theyre more value add for us.

We've seen several examples of that throughout.

And to answer the second part of your question, which is where are we on the pathway or the journey as you will.

<unk>.

We're still in the early innings on that we have a lot of conversion to do and I think we have tremendous opportunity to grow and.

The other thing I'd point out is this solution piece of it changes every time theres a product change from the customer. So this will be a constant.

Area, we think of advantage for us.

Got it okay. That's that's helpful. I appreciate it and then.

Just sneaking one more in you talked about.

Some of the profit sharing agreements then.

Change the bonus payout last quarter.

Mike as we think about SG&A sequentially into Q4 and into 2023 are there any big variables, we should be aware of or I guess kind of one off seasonal elements that we should be factoring into the model.

No I think it's more of the customary things.

It's more generally Q4 little bit lighter sequentially than Q2 Q3, just generally.

Then also you are going to want to factor in.

So much of our incentives tied to profitability. So I think we've mentioned before the sales incentives. For example is roughly 5% of gross profit so profits or gross profits.

Down from Q3 to Q4, which they generally we wouldnt be because it's a slower quarter you'd want to take that into account and then and then bonus expense as well so bonus expenses of around 17, 5%.

This operating profit so again.

Q4 is slower than Q3, which would typically be.

You'd want to we want to adjust for that as well.

Those are those relative to the typical things that we would that we would set in and other than that I don't.

Can't think of anything that would be kind of a onetime.

Adjustment or change.

Got it okay, well I appreciate it and I'll turn it over thanks.

Thanks sure. Thank you one moment.

Okay.

Our next question.

That will come from the line of Julio Romero with Sidoti. Please go ahead.

Hey, good afternoon.

The broader.

Hey.

You guys have really shown off the balanced business model over the last year and a half, but it feels like we're getting off the commodity price rollercoaster so to speak.

Do you think.

Third quarter is more reflective of true profitability across all three segments or at least the closest we're going to get to normalized maybe you can kind of use as a baseline for how to think about.

Go forwards.

Yes, I guess, what I would say <unk>.

I'll take them by segment. So I would say industrial is probably about where I would expect it to be and again, they can make improvements as they sell more value add versus fixed and panels I call. It.

Retail I think as areas to still improve they should be they should be going better and I would say that construction will probably be a little less robust.

So if you kind of take that balance in mind, then I think the third quarter lays out the lumber market factors and some other things kind of more on a general trend basis.

That would be the caveat I would give you is I think retail will do better I think construction will be somewhat less.

It makes sense and I appreciate the answer there I'll.

I will hop back into queue. Thank you. Thank.

Thank you.

Thank you one moment for our next question.

And that will come from the line of James Mccanless with Wedbush Securities. Please go ahead.

Hey, good afternoon guys.

Hey, Jason Hey, Jay.

Matt. Thank you for the shout out on my goals it was very satisfying when so.

Other people around the country glad you like it to.

Yes, absolutely.

So.

Not to beat a dead horse, but just to repeat what you said you said you think <unk>.

Construction is going to be a little bit softer retail is going to be a little bit better I guess following on on that question.

Geographically you guys are pretty well positioned in single family residential because you deemphasize the worst years ago, but when you think about the existing customers you're selling now are you seeing them try to take floor plan sizes down or try to go with smaller builds has there been any shrink in terms of square.

Footages that we need to think about when we're modeling out for construction.

Yes, I think Jay that that's going to be a natural evolution as they try to target affordability, we're definitely seeing that on the factory built side, we've seen that for a while there on the site built side I guess, what I would point to multifamily versus single family <unk>.

As you tackle affordability you can't afford the house are probably likely to ramp probably be easier to rent apartments, and I still think the multifamily market.

It's been strong and that surprised me quite frankly, because I predicted a few years ago. There was a slowdown as it has historically done but thats been strong and I think it's due to the affordability factor. So we expect that to remain strong and again, because we serve both single and multifamily.

It works out well for us and I would just want to point out the answer that I was giving to Julio was more of a general longer term answer not just limited to Q4, so I don't want to mislead anybody that.

No.

Certainly the retail piece is going to be more in line with what Q4 is what's historically done in terms of sales.

But.

I think the profile from a margin standpoint will be better than retail and that would be worse than construction somewhat.

Okay. Thank you for clarifying and actually multifamily was my next question completions. According to the census.

Which had been down call. It mid single digits most of the year had a nice positive pop in September .

Didn't know.

Hey.

Benefit as you get more completions I don't know.

Where do you guys I would assume you guys are at the beginning of the build cycle with multifamily.

But as more of these projects that have been ongoing start to get wrapped up in that cash can get recycled should that potentially be a tailwind for you guys on the multifamily side.

Yes, I think thats a good observation J it actually should be I think.

Correctly pointed out most of the products that we sell are more early stage in the framing piece and we do some now on the exterior solutions with some of our new acquisitions.

But generally speaking I think some of the holdups have been things like appliances and other things.

But.

It should actually be helpful for us as Theres more completion with more money I think.

To that might be higher interest rates.

What impact do they have in the future, but for right now we see it as being very strong.

Okay. Good.

And then on manufactured housing.

I thought it was very interesting your comment about there being potentially an 18 to 24 months tailwind there I guess maybe.

Have we seen a new stream of order is there are you all hearing potential around a FEMA orders for the manufacturers just any any additional depth you could give around that comment would be appreciated.

Yes, and I think.

Again from my perspective, what's going to happen if I follow previous trends of previous Hurricanes. There is there is a belief that things happen immediately and within the first three to six months or something.

Are going to be a big boon somewhere.

My point was really more about it takes a little longer to get in to get financing and even if there's FEMA orders they have to be built and shipped and all that stuff. So.

That's why I'm, giving a more of a longer term deal as opposed to kind of an immediate.

Because I don't think we're going to see an immediate bump. It takes three to six months just to kind of get the cleanup.

I've been down there and seeing some of the destruction. So it's going to take a while before they are able to even be revenue per stop so.

That was more my point there Jay.

Okay Alright.

And then last one.

Turn it over.

Improving labor availability.

Do you have the opportunity in this market to maybe start nudging that average hourly wage down a little bit or is it still pretty competitive from a wage standpoint.

Yes, I don't see wages going down almost regardless of what happens in the marketplace and I think I tried to allude to that one with my inflation comment when you have energy cost and inflation basically chewing up more than all the wage increases it.

Puts the employees in a very very difficult position. So that we want to make sure that we're protecting our our hourly employees, which is why we.

I want to provide bonuses and try to increase wages as we can because they deserve it.

What I would point out however is that as they're as opportunities come up and there is more labor. We've tried for a long time to lead.

What are people were 40 hours and not have to work 50 or 60. So there is an over time component to that that likely would be reduced.

Okay, great great quarter. Thank you I appreciate it.

Thanks Jay.

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 massage for any closing remarks.

Thank you well my recent visits to our operations in Tennessee, Colorado, and Southern California had nothing to do with their teams grid iron performances.

South Florida was sobering.

USP or sending our thoughts and prayers to those who have suffered in the path of hurricane Ian in Florida, Georgia, and the Carolinas and the UFC Foundation is exploring ways that can help provide relief.

We're committed to helping with the rebuilding process with.

The scale of destruction Spurs has to work harder with our customers to develop creative solutions for affordable housing whether on a temporary or permanent basis.

These solutions will not be limited to areas affected by the hurricane because they are needed in all areas of the country.

We appreciate your investment in us as we continually build a stronger USP excellent. Thank you and have a great excellent. Thank you and have a great day.

This concludes today's conference call. Thank you for participating you may now disconnect.

The conference will begin shortly.

As Johan during Q&A, you can dial one one.

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Good day and welcome to the Q3 2022, 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 to ask a question. During this session you will need to press star one one on your telephone you will.

Then here an automated message advising that your hand is right.

Please be advised that today's conference is being recorded I would now.

Now I'd like to hand, the conference over to your Speaker, Mr. <expletive> Gauthier, Vice President of Communications and Investor Relations. Please go ahead Sir.

Dot Com a replay will also be available at that web site.

Before I turn the call over to Matt Massage, 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 1095.

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 our filings with the Securities and Exchange Commission I will now turn the call over to Matt Masada.

Thank you Vic and good afternoon, everyone. Our top stories. This week the Padre as Al said the Dodgers. The Buffaloes won their first game and Tennessee upset Alabama.

It would surprise us all that some gamblers might love me.

Meanwhile, its never a gamble to expect the USP team to work together to commit to excellence and to serve our customers to achieve a new record for sales and profits in the third quarter.

And with trailing 12 months sales of $9 7 billion.

Just short of our long term target of $10 billion in sales.

Since we plan to stay on offense, we will need to formulate new goals for 2023 and beyond.

I am extremely proud of the USB teammates, who love a difficult challenge and historically exceed the target.

In fact, we built this company the challenge with the conventional wisdom and to prove doubters wrong as over our history. We have found ways to perform in spite of obstacles in our path.

We have simple goals at UFP, we don't have mission statements just people on our mission.

Which is to provide a strong return on investment to all of our shareholders.

The fact that thousands of our teammates are also shareholders keeps us all aligned in that goal.

Our diverse end markets and balanced business model provide protection from market fluctuations and also reduce the impact of slowdowns in a single market.

Over the last several years, we have steadily created more value with new products and services and more efficient operations are.

Our objective continues to be to expand innovation and move further up the value chain as we evolve from a product seller to a solutions provider.

We focus on helping ease of customer challenge by providing a solution, which is a better value both for the customer and for us.

Achieving this goal will not only make our performance better it makes us more resilient in difficult markets.

Our long term target is to consistently exceed an adjusted EBITDA margin of 10% and our third quarter performance. Once again demonstrates that this target is not just attainable, but repeatable.

By working together with our customers to provide win win scenarios. We also plan to improve areas, where our returns are lagging.

Now, let's look at third quarter results as well as some examples of our progress towards our goal.

Net sales for Q3 were $2 3 billion with units up a modest 5%.

Net earnings were $167 million for the quarter and diluted EPS was $2 66.

Up 38% of the third quarter of 2021.

Mike will fill you in on the rest of the financial information in a moment, but I would like to review the segments, starting with retail solutions.

As expected <unk> retail solutions performed much.

Much better in Q3 than a year ago.

The promo and sunbelt teams reflected this trend despite having challenging cost increases that were not repeated in the third quarter.

We expect to see cost increases come through in Q4 and recognize that we may lose some unprofitable business in the process.

The promo at Fr fire retardant sales have seen 27% unit increases from our internal capacity additions and in 2023, we will have a fully integrated fire retardant treating system using our own PFS proprietary chemicals.

And as chemical transportation and labor costs continue to rise it will be important for us to stay ahead of the pricing curve.

Decorators continues to increase capacity as the newly installed equipment is up and running both for wood plastic and mineral based composites.

Because we primarily self distribute we haven't incurred the volume decreases from channel Destocking that some of the larger companies in this space have endured.

Our <unk> acquisition earlier this year it is helping our wood plastic component composite operations achieved a 90% plus recycled products content on our newly installed equipment.

We look forward to further improvements in more scalability of this operation.

And our mineral based composites operations are using nearly 50% recycled materials and we expect to be able to grow that to over 75% over the next 18 months.

Our new unique aluminum rapid rail pre assembled deck railing products will roll out in February of 2023 and.

And decorators continue to customer and market acquisition efforts by adding distributors in the UK and in France.

Moving to construction construction had an incredible quarter cycle business unit performing exceptionally well.

Unfortunately, as I feared the fed appears to be impatient with its approach to rate changes not allowing them to work through the system before adding additional hikes using.

Using leading indicators instead of lagging ones may help the fact, the softer landing and we will watch these moves carefully and adjust as needed to meet customer needs and continue to add more value.

We still expect at least single digit percentage declines in housing starts over the next two years.

With our business model and our geographic locations, which tend to be in areas, where long term growth as expected.

Level of activity will still result in very good performance in our site built business.

Factory built remains strong and the affordability that factory built homes provide makes it an attractive option with rising interest rates and inflation.

The affordability of factory built will be sought after attribute an app in the hurricane and rebuilding efforts.

We expect a significant lift from these sales in Florida, and Georgia over the next 18 to 24 months.

Concrete form is forming services demand is solid and we expect seasonal slowdowns in those areas of the country that can build year round.

Value added sales increased to 48% during the quarter.

We have not yet seen any significant activity from infrastructure spending within the concrete forming group.

Although we are optimistic that that will be forthcoming.

And the efforts to improve financial and operational performance in the commercial construction area are being well executed and they operated at a functional capacity in Q3.

We expect to see a typical seasonal slowdown in Q4, but remain optimistic for continued improvements in 2023.

Moving on to the UFP industrial with the exception of the slowing in the southwest machine belt pallet demand is strong.