Q4 2022 Ufp Industries Inc Earnings Call
The conference will begin shortly to raise and lower your hand during Q&A you can dial stuff one one.
[music].
Okay.
Good day and welcome to the Q4 2022 U S. P 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.
Press Star one one on your telephone you will then hear an automated message advising your hand is right to withdraw your question Press Star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker, Mr. <expletive> Gauthier, Vice President of Investor Relations, Sir the floor is yours.
Yeah.
Welcome to the fourth quarter 2022 conference call for UFP industries hosting the call today are CEO , Matt <unk> and CFO , Mike Cole, Matt and Mike will offer prepared remarks, and then the call will be opened for questions. This conference call is available simultaneously in its entirety to all interested investors and news media through our web.
Site at USPI Dot Com a replay will also be available at that website 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 $19 95.
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 Exchange Commission now I'd like to turn the call over to Matt massage.
Okay.
Yeah.
Thank you <expletive> and happy Fat Tuesday, everyone.
Thank you for joining our fourth quarter and year end 2022 call.
It was a banner year with a record $9 6 billion in net sales.
Some of you are wondering why I couldnt cobbled together, another $400 million to make it an even $10 billion to hit our $2027 five years early.
It is something I will work on.
For the incredible year, our USP teammates deserve all the accolades I want to thank each one of them for working so hard to provide excellent products and services to our customers, which in turn allowed us to break records.
And to reward our teammates with well deserved bonuses.
We were also able to add over $60 million in year end bonuses and other extra compensation to our hourly and production team mates.
It is truly exceptional.
Now I feel a bit like someone who finish up a delicious meal and said this is the best meal I have ever eaten.
And he immediately thanks.
Is that as good as it will ever get.
Well, we certainly don't think so.
While we enjoy and celebrate positive achievements, we are constantly looking to improve.
We are creating new recipes to make sure that the future can be favored even more.
But I'm pretty sure you didn't join this call to celebrate 2022 or to do meal planning for the future.
You are far more interested in what's going to happen in 2023 and beyond.
We have reviewed countless forecast predictions opinions and peer gases, which seemed to change frequently.
It is difficult to find the consensus but here is where our leadership team stands today.
New home construction is likely to fall, 15% to 20% from 2022 levels.
Interest rates will move probably up during the first half of the year and maybe down in late Q4 early 2024.
Government will continue to borrow and become an even larger portion of total domestic spending.
As an aside we should probably spend our grandkids a thank you note for this funding.
Other data points are less clear.
While we believe we are likely already in a mild recession. The question is how will land.
While the economy have a hard landing.
Mood soft landing.
Or a soft landing with the wheels up which will definitely lead to marks.
While consumer spending continue or have the effects of inflation curve individuals' spending power.
Since we cannot control these external factors the Ust team is poised to do what it always does.
Execute our plan and continue to position our company for even better success in the future.
We have accumulated a significant amount of capital during the last two years and are well positioned to take advantages of opportunities we expect to see.
We will stay operationally aggressive and fiscally conservative using our balance sheet to support our growth and value creation.
Our unique business model allows decisions on cost containment staffing and inventory levels to be handled by those closest to the action.
And we don't wait for events to make decisions.
2023 may be a turbulent year, but we will adjust quickly as needed to be efficient in our operations, while being nimble and pursuing growth.
Now, let's review segment performance and outlook.
And retail solutions as a value added manufacturer seller and self distributor our products provide solutions for the DIY consumer as well as the professional contractor.
Our new President of retail solutions will Schwartz has hit the ground running.
This was our largest segment by sales volume and it has significant opportunities for creating synergies and scaling new and existing products.
Our decorators product line has moved up to number three on the 2023 life story research most trusted brand list.
And while we are pleased to be moving up we are focused on becoming the best and staying there.
The recently added capacity in mineral based manufacturing will allow us to launch additional new products, which utilize our patented technology, which is already a favorite among installers and homeowners or at the esthetics durability and sustainability.
The number of decorators certified professional installers has grown and they have become enthusiastic brand advocates.
Our <unk> and Sunbelt units are utilizing our performance formulations chemical company to grow fire retardant treated lumber sales.
While developing new and improved preservative to position our future growth.
We continue to work with our customers to enhance our value proposition and to expand our industry leading market position.
UFP edge siding pattern and trim products are excellent as our custom coding capabilities as well as thermally modified wood product offerings are well received.
The financial performance was disappointing in 2022 due to delays on automation equipment, not being delivered and installed in a timely fashion.
We are looking for significantly better results in 2023 from this unit.
Our E Commerce platform continues to grow and serve our customers with direct fulfillment.
Many of our manufactured products.
And our retail solution strategy is simple one provide innovative new products and solutions.
To find and harness opportunities.
<unk> select and build the right brands.
For utilize our national reach purchasing expertise and distribution network to provide the best customer value.
The outlook for retail in 2023 is generally steady for repair and remodel.
Big box is forecasting flat unit volumes and are expected to take share from other retailers.
Independent retailers predicting flat to down somewhat.
The first quarter will be difficult to compare against 2022, but we expect easier comparisons in Q2 and Q3.
Moving on to construction or precedent up construction, Patrick Benton did an excellent job leading his team to record 2022 performance.
The results were impressive and the group has already adjusted to the lower trend line in new housing both in site built and factory built.
Mike will provide more details on trends, but this is the area where costs will be most difficult in 2023.
The forecast for housing starts is in the range of 15% to 20% below 2022 levels.
And our balanced approach serving multifamily as well as single family helps position us well in the markets, we serve which also tends to be the more resilient markets in the country and which continue to gain population.
We are well positioned to meet anticipated market needs and we will continue to adjust to the actual market conditions going forward.
Overall starts around the $1 3 million rough estimate still provide ample opportunities for us to produce a strong year with a good ROI.
We've noticed that multifamily continues to show strength in many markets and the build to rent investments by equity funds may help bolster the housing starts numbers.
Factory built is expected to have a trend line similar to cycle barring more interest rate changes.
Factory built housing is still the most affordable option in our factory built customers are predicting a better back half of 'twenty three than the first half.
RV may take longer to recover although it is not a big portion of our business.
Our product innovations and R&D may help us gain share even with the smaller market size.
The outlook for concrete forming and full commercial construction is solid for 2023 with some new infrastructure projects coming online.
We will be adding additional lay down yards for concrete forming in 2023 to serve both new markets.
Better growth prospects and to expand our capabilities in existing markets.
Overall for construction, we will rely on our experienced management team to guide the business through any uncertainty and still produce strong results.
U S packaging sure seems like a better more fitting name to me than USP industrial.
We hope you agree.
Got Worthington and his team have streamline their segment, creating more focus and speed and have generated enthusiasm both with the customers as well as with the packaging team.
We have many runways and diverse end markets to pursue such as durable goods appliances light and heavy equipment, agriculture, moving and storage automotive furnishings horticulture and glass.
The packaging industry is very fragmented and our very modest market share leaves tremendous opportunity for growth.
The recent acquisition of Titan and all boxed up creates a connection to corrugate conversion in printing and gives a great touch point with existing and new customers.
Increasing our design engineering testing and analytical capabilities has helped create more opportunities to bring solutions to customers.
Who value that level of expertise and creativity.
Adding increased capacity in steel and other materials creates improved value propositions for mixed materials packaging.
We expect to expand these capabilities in our markets.
Pallet. One has also performed very well and we will continue to expand its national footprint utilizing existing UFP locations where practical.
Again, while there will be economic challenges the long term outlook for USP packaging remains strong.
We will continue to invest in automation innovation and acquisition to advance our goal of becoming a global packaging solutions provider.
From an economic outlook, we expect summer on ways to grow while others are flat to down.
Our conservative estimate overall for UFP packaging is flat to down 3% in units.
Our international team has focused heavily on extending our packaging solutions to multinational customers.
Our core capabilities in India, and Australia are stripped back branded products in the Asia, and other markets and pallets and structural packaging in Mexico, Europe , and other end markets enhance our total product offerings.
Our international sourcing and sales efforts create worldwide supply capabilities for both our domestic and foreign customers, which we will also be enhancing in 2023 with new technology.
Some other areas of interest are in the new product space.
Sales for the fourth quarter were $164 million and for the year were $736 million.
Both numbers exceeded our targets.
And while we beat our targets in 2022, we need to do better and have created a target for 2023 of $795 million.
We know the world is moving faster and we need to stay ahead.
And the best way to add lasting value to provide the consumer with a product that meets an unmet need.
Our investments in the innovation accelerator accelerator assist speed to market for new product ideas by rapid iteration and faster scale and synergy.
Our recently launched innovate fund is very actively seeking late stage development or early stage commercialization projects.
Best opportunities will fit within our enterprise and can be scaled broadly and rapidly throughout the organization.
The goal of this innovation team matches, our internal company theme for 2023.
We need to innovate to dominate.
And purchasing the lumber market has been trending up slightly since the beginning of the year, but does not appear to have the same movement of volatility as a year ago. We.
We expect that the mills will better manage the supply side and unless there is unexpected high demand. We don't anticipate the same levels of the lumber market. We saw it in 'twenty two or 'twenty one.
This will likely cause revenues to be lower EBIT on the same level of unit sales.
UFP transportation has invested to improve our delivery cost and efficiencies with new technology and new leadership.
Shannon Evans, our new VP of transportation has instituted several changes already and will bring improved performance to this profit center.
We are excited for her vision to take shape.
Human capital, while the typical unemployment numbers remained low the UC index was over 6% and the workforce participation rate is below historical highs.
Finding applicants is getting easier defining those who wish to work hard and our industry remains a challenge.
We know others face similar challenges so we seek to be an employer of choice in part by providing significant rewards to our teammates when we perform well.
We balance our workforce among segments to ensure easy transfers from areas, which are seeing a slowdown to those that remained strong.
We also are expanding.
Standard recruiting efforts to areas that are unfamiliar with USB and may not have understood. The breath of opportunities offered by our company.
Those who start at the ground floor and work their way up with training Mentorship and practical experience provided by the company.
All who want to work hard to create a better life for themselves and their families are welcome and encouraged at UFP.
Now I'd like to turn it over to Mike Cole to review the financial information.
Thanks, Matt and good afternoon, everyone.
Our consolidated results. This quarter include a 10% organic unit decrease as demand dropped in our site and factory build business units as well as our retail segment.
These decreases were partially offset by a substantial gain in our concrete forming unit while volume in our packaging segment was flat.
And EBITDA margin over 11%, despite the volume decline, reflecting the overall stability of our packaging segment.
Operating cash flow for the year of $832 million up $320 million over last year, resulting in a strong balance sheet with $1 8 billion in liquidity, including a net cash surplus of about $280 million.
And an exceptionally strong 35% return on invested capital for the year.
Now I'll walk through the financial statements for the quarter in more detail starting with our sales by segment.
Retail segment sales decreased by 2% due to a 9% decline in organic unit sales and a 2% drop from the transfer of certain product sales from our retail to our construction segment.
These decreases were partially offset by a 2% unit contribution from acquisitions and a 7% increase in selling prices.
As expected, we faced tough unit comparisons this quarter compared to last year as our sunbelt outdoor essentials and UFP edge categories, each experienced a significant drop in volume.
Organic volume of decorators was down modestly while our pro with organic volume was flat year over year.
Sales from the packaging segment increased 1% due to an increase in selling prices.
Organic units were flat as we were able to offset a decline in volume to certain customers with market share gains.
Our team continues to focus on enhancing our mix of value added products that offer solutions to our customers' packaging requirements. As a result value added sales increased to 76% of sales in Q4 compared to 71% last year.
This strategy continues to benefit our gross profits and margins, which I'll review shortly.
Our change in organic volume includes gains from $35 million in sales to new customers 21 million of sales to new locations of existing customers and $31 million of new product sales.
These gains were offset by declines in sales to other accounts.
Our construction segment sales decreased 11% due to a 16% organic unit decline offset by a 3% increase in prices and a 2% increase.
Due to the transfer of sales from retail.
The overall organic unit decline resulted from a 27% decline in cycle, a 12% decline in factory built and a 2% decline in commercial.
These declines were offset by a 21% increase in concrete forming.
The increase in our overall pricing is primarily due to our <unk> business unit, which continues to work through its backlog of orders.
Moving down the income statement, our fourth quarter gross profit decreased by $14 million.
We're 4% comparing favorably with a 9% decline in unit sales.
New products and enhancing our mix of value added product sales continued to be key strategies to improve margins across all our segments.
An increase in new product sales contributed $10 million gross profits.
In value added sales increased to 68% of total sales this year from 65% last year.
By segment retail gross profit decreased by $5 million compared to last year, primarily due to a drop in unit sales combined with unfavorable cost variances.
Yes.
Packaging as gross profit increased by $7 million, primarily due to a value based or value based selling initiatives and favorable changes in product mix, including new products.
Construction's gross profit decreased by $16 million. The overall decline was due to the organic unit decreases we experienced in our site built and factory built units as well as unfavorable cost variances, we experienced in our sizable unit due to its drop in volume.
These decreases were offset by gross profit increases in our commercial and concrete forming units.
Continuing to move down the income statement, our SG&A expenses increased by nearly $5 million.
The components of the increase included an $18 million increase in wages and benefits and a $2 million increase in travel costs, partially offset by a $15 million decline in sales and bonus incentives.
Sequentially, our SG&A fell from $214 million in Q3 to $183 million in Q4, primarily resulting from a decrease in sales and bonus incentives and bad debt expense.
Finally, our operating profit decreased $26 million driven by decreases of $22 million in international $14 million in retail and $4 million in construction, which were partially offset by increases of $7 million in packaging and <unk> 8 million in corporate.
It is important to note that the drop in international is partially offset by a $9 million decrease in earnings attributable to Noncontrolling interest presented further down the income statement.
Moving onto our cash flow statement.
Our net cash flows from operations for the year was $832 million and consisted of net earnings and noncash expenses totaling $844 million compared to $655 million last year, and a $12 million increase in net working capital since the end of 2021 compared to $143 million increase last year.
We measure our cash cycle to assess our working capital management and it increased to 66 days this year compared to 57 days.
In Q4 of last year, primarily due to a four day increase in our receivables cycle and a four day increase in our days supply of inventory.
Our investing activities for the year included capital expenditures totaling $174 million, including expansionary and efficiency capex of $71 million.
Due to the long lead times for equipment. The amount was at the low end of our anticipated range for the year.
And we invested $176 million on previously announced acquisitions, including the December purchase of tightened corrugated and its affiliates all Baxter.
Finally, our financing activities for the year included $59 million of dividends $96 million of share repurchases and debt repayments of $41 million.
With respect to our capital structure and resources at the end of December we had $281 million and net cash surplus compared to $51 million and net debt last year and our total liquidity was $1 8 billion consisting of surplus cash of $559 million and availability of $741 million under our revolving credit.
And $535 million under our shelf agreement with certain lenders.
The strength of our cash flow generation conservative approach to managing our capital structure and prudent return driven approach to capital allocation has provided us with an abundance of capital to grow our business and also return to shareholders. We will continue to pursue a balanced returns driven approach across dividends buybacks.
Capital investments in M&A, specifically, our board just approved another quarterly dividend of <unk> 25, a share representing a year over year increase of 25% over the March payment a year ago.
We have a share repurchase program approved by our board of directors and have their authorization to buyback up to 2 million shares in the past we repurchase shares to offset the effect of issuances, resulting from our employee benefit plans and at opportune times, when our stock price falls to predetermined levels.
We anticipate capital expenditures of $200 million to $225 million next year.
Priority continues to be given the projects that enhance the working environments for our plants take advantage of automation opportunities and drive strategies that have long term strong long term growth and value potential of new and value added products.
Lastly, we continue to pursue a healthy pipeline of acquisition opportunities of companies. There are strong strategic fit and enhance our capabilities and competitive position, while providing higher return margin return and growth potential.
I'll finish up with comments about our outlook for next year.
We believe lumber prices have normalized and anticipate prices will not follow a seasonal pattern consistent with historical trends and demand.
This will impact our overall sales levels when compared to the elevated prices, we experienced last year, which we pass through to our customers.
We're currently planning for a mild U S recession, a purely short duration in 2023 impacts in the markets we serve as follows.
The thing starts of about $1 3 million, a 15% to 20% decline impacting volumes in our site built and factory built units.
Remodeling activity in Big box same store sales growth that is flat with 2022 impacting volume in our retail segment.
And overall industrial production in a range of flat to slightly down with mixed results by runway impacting our volume in our packaging segment.
With respect to profitability on a consolidated basis and based on our 2022 results of operations and business mix. We believe our decremental operating margin is 15% to 20% of net sales.
And our 10-Q and in our 10-K, we mentioned a variety of key factors that may impact, our decremental margin and encourage you to consider those as you evaluate expectations of our future results.
Finally in light of the impact of the cooling housing market and softening economy I'll leave you with some additional information on recent trends and our sales and operating profits in.
In Q4 after a strong October our results trended down in November and December .
Recently, our year over year sales in January were down roughly 18, 5%.
And year over year operating profits fell by about 37, 5%, which we believe is in line with the outlook information we just provided.
That completes my review of the financials Matt.
Thank you Mike now I would like to open it up for any questions that you may have.
Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment, while we compile the Q&A roster.
First question will come from Julio Romero with Sidoti. Your line is now open.
Thanks, Hey, good afternoon, Matt, Mike and Nick Thanks for taking the questions.
Alright.
So Mike you might have just answered this with your with your ending comments on the trends in January but.
If you could maybe just talk about I guess.
Demand.
It has been trending on the residential side.
There's been some optimism.
Just given the mortgage rates coming down somewhat in January .
You heard anything youre seeing anything that is <unk>.
Maybe.
Indicated any change in demand or activity levels through through January and February .
Yes, what I would say Julio might can probably dive into a little more detail. What I would say is that it's going to be a little bumpy I think theres been the rate changes have gone down and come up a little bit so.
I think it's consistent with the trends that Mike outlined kind of where I would say we are today.
Okay.
That makes sense and I guess.
If you guys could talk a little more broadly about the rebranding of the pack of the industrial segment to packaging and maybe touch on the tightened corrugated deal and how you see that fitting into the segment.
Sure, Yes, I think the USP packaging name I give the team a lot of credit for that I think seven.
Several investors talk to us about the Navy UFP industrial what does that mean.
What is it what is involved with that.
The more descriptive and informative name as UFP packaging because that really describes what that segment is doing they are providing packaging solutions to customers.
Utilizing the design and engineering capabilities and creativity that we have and also the ability to provide mixed materials.
The goal is to take more of each customer's share of their spend on packaging materials. So we added the labeling company a little over a year ago.
Corrugate is an area that we have been involved in.
In Australia and in India.
Looked at it extensively in the U S and we thought a really good company and tightened corrugated.
To help drive that business going forward, there's a lot of synergies with our customer mix both customers that we have that utilize their product as well as customers that Titan has an all boxtel path that we did not have so.
It will expand our customer reach as well, but I think the.
The whole notion of packaging at this point is we're going to drive more sales, we're going to be a more complete supplier to those customers.
Got it I'll circle back with any follow ups. Thanks, a lot.
Thank you Ware.
Thank you one moment our next question.
And that will come from the line of Kurt Yinger with D. A Davidson your line is open.
Great Thanks, and good afternoon, Mike.
Hey, Curt anchor.
Just wanted to start off on retail organic units in Q4.
I know you talked about some of the different business lines, but could you talk about maybe what was perhaps.
Disappointing there in terms of the Q4 performance and what gives you confidence.
Into 2023 that you can hold volumes kind of flattish there.
Yes, I don't I don't know that there was anything necessarily disappointing I think we expected to have tough comps and through some <unk>.
Destocking thats going on in somewhat in the channel and so that contributed to the softer sales in Q4, but.
We're pretty optimistic for retail for 2023.
Not only because.
The unit sales.
But also because of profitability last year for retail.
Particularly tough they're dealing with the lumber market.
Did what it did filing from well over 1000 levels.
Quite low more recently there was a <unk>.
Year for them to battle and we do so much treated number that it is really tough for the segments.
We're optimistic for a much maybe not as good in terms of overall sales outlets because of lower lumber prices, but much better in terms of profitability.
Okay.
I guess, you're still a little bit of my Thunder with next question, but I mean in 2021 and 2022 as well.
Seen swings in Lumbers, both ways, but it seems like the headwinds on the downside have been more meaningful than perhaps the benefits on the upside.
Do you feel comfortable with the idea that segment gross margins the last two years or perhaps below what you would consider normalized for that business potentially double digits going forward.
I think if you're talking about retail.
Yes.
I would say.
Yes, I think I think you are looking at it correctly I think the the rise and the rapid decline of the market and the extended declines of the market from those high levels definitely compressed margins.
So I think a little bit more balance in the lumber market definitely will help us there.
And so.
Mike is right in the outlook from.
Our unit sales I know the big boxes announced very very recently.
Their trends aren't as strong as they originally thought but I still think kind of a.
A flattish kind of market for them that they plan to take share from others.
I think there'll be successful on that initiative.
Got it okay that makes sense and then just lastly on the decremental margin side I mean at least historically, we've kind of thought about lumber fluctuations specifically.
And how they impact sales being fairly neutral on profitability and I recognize that perhaps the last two years have been a little bit unique from that perspective, but does that statement in the decremental margin range.
Apply to.
I guess the sales headwinds that you expect from lumber prices being lower on a year over year basis.
Yes, it does curve so there's a lot of moving parts in that decremental margin disclosure right. So.
One of them is lumber prices and what lumber prices are going to do to the sales, but also what it was going to do to the cost line and our overall profit per unit. So we tried to be thoughtful running different scenarios with all of those different factors in mind and 15% to 20 with the current mix it looks it looks like a good range.
Okay. Okay sounds good thanks for the details guys.
Thank you.
Thank you one moment our next question.
I will come from the line of Stanley Elliott with Stifel. Your line is open.
Hey, Matt Mike <expletive> Thank you guys for the question.
Okay.
The packaging business you guys have definitely have.
Really kind of expanded the capabilities of the group.
Quick from like conversation time too.
Do you actually get in your hand, and it's hard to put new products to work out there just trying to see kind of what level.
Opportunities I guess within that within the course of the year, we might be able to see.
Well.
Yes, it's a good question Stanley I would tell you it's never happens as quick as we wanted to.
But I think.
Unlike some some areas where if we're just adding on products to an additional customer or an existing customer rather that tends to be a little bit of a shorter timeframe than if were going in and providing a new value solution for a new customer to really help.
Take take cost out of their operation or to make something better for them.
Bring them value so those tend to be longer duration sales efforts, but the results of those tends to be greater.
Great.
Appreciate the additional color kind of on the quarter to date, but.
With the uncertainty I guess in the market how quickly can you guys pivot to restructuring if you're if we're not really in a kind of a mild recession, if it's worse than that.
Conversely, kind of maybe some of the levers you will have to pull some additional growth to continue to take share there too.
Again really good questions I think our decentralized model enables us to react very quickly to the conditions that occur in each of the locations that we serve.
And as I mentioned in my comments, we really don't look for an event, where we were not like a tech company, where we do like a mass adjustment.
Each each entrepreneur that runs our operations is making those decisions on a day to day basis.
So I think we can react very very quickly as we've proven in the past.
And I think Mike pointed out very well that the capital we have accumulated.
It will allow us to take advantage of opportunities that we expect will happen here in the near term, particularly if things get tougher for others. So we're well positioned to weather. The storm, obviously nobody wants one but we also are well positioned to take advantage of growth opportunities and take market share.
Perfect guys. Thanks for the color and best of luck.
Thank you thank you Kevin.
Thank you one moment our next question.
And that will come from the line of Reuben Garner with benchmark. Your line is open.
Thanks, Good evening guys.
So.
Sure.
Maybe you gave some.
Some helpful color on what the year may look like from a volume perspective by segment.
Just given the way you're kind of discussing the decremental margin can you can you give us a sense of what.
If lumber prices do just kind of act normal seasonally what kind of pressure that puts on pricing in the top one for modeling purposes, and if it's obviously higher or lower than where it is today, we can make adjustments, but any kind of color you could give the kind of it's all there.
It's been a volatile couple of years, so to kind of square all squared up or so it would be great.
Yes, because of the change in the mix and because you're becoming more value added numbers, becoming less and less of a component of.
Of sales right and so, but having said that.
The 18, 5% decline.
To us in January .
Pretty good barometer for.
What did the effect of lower volumes and the effect of lower lumber prices can be on sales to us. So.
When you look at lumber prices in January a year ago. They were up over 1000 Bucks a thousand.
And now they are obviously.
With that so.
At that in January .
It could be a pretty good representative month of lower volumes and lower prices.
From lumber.
Perfect sorry, I was stuck on mute.
And so.
My follow up would be on.
The retail business that you mentioned.
Destocking.
We were obviously we were at the builder show sorry, there a few weeks ago it sounded like.
Some encouraging.
At least initial green shoots about what the spring to be like for both retail and housing.
Is there when you say the destocking in the channel are we to a point where.
From here there is more upside than downside like what does the channel look like relative to maybe normal pre pre COVID-19.
I think what I would tell you there Reuben it's very product specific I think for the most part.
The retailers are managing their inventories.
And I think their outlook their forecasts have adjusted and how they adjust their inventory levels, but I would say again, we can't predict what's going to happen going forward, but the.
Current trends and the outlook continues I think it will still be a very stable good year with retail and we should perform better than we did a year ago.
Simply because of better execution and better structure and not the rollercoaster of the lumber market.
Okay, great. Thanks, Congrats guys on a strong close to the year and good luck in 'twenty three.
Thank you thanks Ryan.
One moment our next question.
And that will come from the line of Jay Mccanless with Wedbush Securities. Your line is open.
Hey, good afternoon, thanks for taking my questions.
The first one.
Hey, guys.
So really good deceleration in SG&A dollars from <unk> to <unk>.
Is that.
Level.
Probably something closer to what the run rate quarterly run rate is going to look like in 'twenty, three with lower lumber prices.
Yes.
The drop from Q3 to Q4, James was pretty much driven by the lower profitability. We had in Q4 relative to Q3, so much of our comp is.
As variable base, so sales incentives averaged about 5% of gross profits.
Bonuses.
Average about 17% of pre bonus operating profit so with those numbers you can kind of figure out from quarter to quarter roughly.
The sales and bonus incentives are and so the way that I typically think about it is if you take the current quarter, which is most representative.
Cost structure.
You remove.
Bonuses and sales incentives.
And then the core SG&A to need kind of it runs more flat.
Building in some of the inflation of course, but.
And whatever other adjustments, we may need to meet to head count and other changes in the cost structure from there then you might win based on gross profits in pre bonus operating profit.
Sales incentives and bonuses.
That's pretty much why they fluctuate so much from quarter to quarter.
Got it.
And then the year over year increase in the gross margin percentage.
Would it be fair to say that the majority of that is just based on the larger percentage of value add from from.
This year versus last year or are there. Some other things we need to think about what that gross margin percentage growth.
Looking back at the year.
We talked a lot about retail retail flow.
The gross profit percentage within retail.
It has been for the last two years with the volatility in prices and having all of that variable priced products. So we expect better there for retail.
Looking back at it.
Packaging.
Packaging had a great year most of that is value based selling sales mix in all of those positive changes in the business, we feel like the structural changes.
Maybe some part of that though is yet.
Following number prices for.
Some part of the year and I'm, just kind of a lagging that you get with.
With pricing.
The big the Big change, we think it is going to occur on the cycle side. So on the <unk> side.
As a.
It was very strong.
Market conditions.
<unk>.
And then for much of the year with lumber prices falling.
Those prices are fixed.
Gross profits within the cycle unit were really strong and so there is one area that's going to normalize thats the most prominent within.
Within that detrimental margin is the site built area.
And then retail is tough is that helpful.
The offset to that.
Okay.
Okay.
And then the last question I had I think you said.
Concrete forming.
If it was up 21% and just net sales or if that was 21% higher than volumes maybe.
Is that a trend we should expect to continue.
Are you are you finally, starting to see some benefits from the highway Bill and some of the other infrastructure things that were announced I think a year or so ago.
Yes, I would say Jay we're starting to see some impact from some of those projects.
Any new infrastructure.
Public works type items are being funded so that's a benefit and I think that the.
The team has done a great job of really growing they have built up personnel and these additional locations. We talked about we're going to help drive more sales. So the push there continue to be more value added continue to provide that service to the customers and expand our geographic reach so.
We're very optimistic about the growth.
Trend line for concrete forming.
The money that's being invested is starting to show up with I think that's a small part of it at this point.
Yes.
For me in commercial to really have a great opportunity to be a helpful. Helpful offset just like retail on that and that decremental operating margin. There is room for further improvement there.
Got it alright, well that's all I had thank you again for taking my questions.
Thank you Jason.
Thank you one moment for our next question.
And that will come from the line of Keaton, Ma'am Torah with BMO capital markets. Your line is open.
Thank you and congratulations on a good credit when they do I also want to highlight.
All the progress you guys have made in improving the disclosure both in the release and also in your prepared remarks today. So congratulations.
Thanks, Keith for what to make your job easier.
Thank you.
Maybe just start with first question coming back to the retail side.
Is it possible to provide some context as to how the sell in is looking versus sell through for some of your customers and we've talked about inventory Destocking do you I'm just curious.
The stock grant quantity is that more or less matching at this point or not yet.
Yes, I don't have great visibility into that Keith and I think if you followed the retailers' sales numbers that they are providing and what they will have a better.
For what is in inventory and there are a variety of distribution centers in their stores.
What we tend to do is try to match up our deliveries since we can ship store direct wed like to be able to do that so.
We'd like to see more movement through our sales and we try to match those with what the store sales are and I think we tend to be closer at that on most of our main product offerings.
The more specialty items.
That go through a distribution center to a little more difficult to quantify.
Got it.
And then.
I'm not going to talk a little bit about what you guys are targeting in terms of new product sales for this year.
Yes in terms of the number of $795 million or specific products or <unk>.
Both both they found the highlights on a couple of things obviously, you've got a lot of different things coming through but maybe just a couple of things you may want to highlight.
Yeah. So.
Normally we don't provide disclosure on individual new product items, but what I can tell you just kind of general categories. Obviously, the decorators product line that called out some some items there using that technology. There are other building products items, we've been working on and hadn't really had the capacity to be able to.
Pursue those.
Now that we have added capacity, we can pursue some of those other product lines. So that's one category I would say and then the other on the packaging side some of the things that we've acquired as well as some of the things that we provide.
Strip pack for example, there is a number of items there that will help drive that new product sales.
Got it that's helpful and then Mike when you talked about January trends I, just want to make sure I had the right numbers you talked about seen down 18, 5% that I thought I heard you also talk about you pick number did I catch that <unk> did not.
Operating profit so just straight operating profit not in that adjusted EBITDA operating profit was down 37, 5% sales were down 18%.
Got it and then.
Mike is it possible at all just directionally.
Talk about how the three segments performed.
Within the numbers that you just gave.
Yes.
Yes, I think thats, probably a good color.
So I mentioned the high lumber prices that January last year versus January this year right. So that the $18 five would present, a very conservative look at sales if you use that going forward, but.
In any event that those high lumber prices allowed retail to make.
Quite a bit of money.
Last year, so retail dropped the furthest in January .
But it was because they had they had low cost of lumber buying in Q4 and selling into a much higher market January February March of last year. So retailers. The biggest drop on our site built was next in an industrial hub or excuse me packaging, that's still getting used to that of its own pretty well.
Got it that's very helpful color I'll turn it over thank you.
Thanks Keith.
Thank you one moment our next question.
And we do have a follow up question from Kurt Yinger with D. A Davidson your line is open.
Hey, Thanks, just two.
Two quick follow ups first on the packaging business I mean, the gross margins continued to be very impressive do you think the recent results there are sustainable or perhaps something you can even build upon this year within that kind of assumption of flat to perhaps down three on volumes.
Well Kurt.
Fair question, but it's not one that I can really answer.
I would say that they have opportunities to increase value add and I think thats the direction, they're going in as we talk about all the time they are still sticks and panels business that's being done.
They're trying to convert that to more value add so that's definitely a margin enhancement.
Some of the other things on the sales side or more difficult at this point to kind of quantify.
Okay, that's fair enough and then.
I guess sticking with the packaging segment.
Over the last couple of quarters.
Pricing there has.
Most completely decoupled with trends, we've seen on the lumber side.
Is that how we should think about the pricing element going forward or do you expect the year over year lumber deflation in 2023.
We will start to show up there to a greater extent.
Yes, I think there may be some compression due to that but I would say overall the value. That's being added is added and Mike pointed this out this out before.
The value of the lumber as a.
Total as a percentage of the total sale.
Got in less due to the other value that we're adding.
Through our design engineering and packaging solutions team, so I would say that.
We would expect the vast majority of that value add to remain.
Got it okay. Thanks for that Matt and good luck here in Q1 guys.
Thank you thank you Sir.
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 again for spending time with US today I know many of you are headed off to celebrate and maybe you have your own personal Mardi Gras, So hope that all goes well.
We know that 2023 is not forecasted to be as good as 2022, but as the professional either I referred to in the opening those well it would still be a very good meal.
We're confident that we can create the new best year ever in the next few years.
We have all the ingredients the people the products and the passion to create an even better recipe for future success.
With a little cooperation from the economy and less intervention from those who create more problems than they solve I.
I am confident that our team will innovate to dominate in 2023 and have a great day.
Thank you all for participating. This concludes today's program you may now disconnect.
The conference will be.
The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.
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