Q2 2023 UFP Industries Inc Earnings Call
Okay.
Good day and welcome to the Q2 2003, 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 messages by using your hand is rain. So 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> Coffee, our vice President of Investor Relations, Sir the floor is yours.
Welcome to the second quarter 2023 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 website at UFP.
Dot Com a replay will also be available at that website before I turn the call over to Matt beside 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% leased.
These statements are subject to risks and uncertainties that could cause actual.
Our 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 <unk>.
Thank you Dirk and good afternoon, everyone. We appreciate you joining our second quarter 2023 earnings call.
Q2 was like a steeplechase Ryan with plenty of hurdles and other obstacles and some competitive pressures thrown in for good measure.
Our team definitely gave it their all in like Kenneth Brooks.
Severe and came out ahead at the end of the quarter.
Our earnings of $2 36 per share exceeded estimates and EBITDA margins remained strong in spite of lower sales volumes.
In addition to the financial metrics. This quarter helped demonstrate the strength of the strategy business model and ability to react quickly to market changes we.
We set a high bar for ourselves and for our energies into exceeding it.
The value of the balanced business model proved itself in the results some business units faced tough economic environments, while others did not and performed better.
But our diverse mix of end markets and customers helps fuel long term success, while providing strong returns.
We continue to see the positive financial effects of our 2020 restructuring and increases in value added product mix, which have driven more focus and better returns than similar periods in the past.
As a result of these improvements and our long term optimism. We are pleased to report that our board has increased the cash dividend for September and increased the share repurchase authorization for the next 12 months.
As evidenced in the first half of the year 2023 will not be a smooth here.
Some of the macro factors, which affect our strategies include one interest rate hikes, which notched upward last week the.
The status of future hikes is uncertain.
Another hike as possible this year something about an election year and interest rates leads me to believe that rates are more likely to fall sometime in 2024.
Two new housing starts.
Which were a rollercoaster during the quarter based on seasonally adjusted monthly data, however, and most of the markets. We serve demand has been resilient.
Three capital, which will be at a premium at a higher rate environment.
And Fortunately, we have ample capital for both our growth plans and for returning more to our shareholders.
Four.
M&A activity, which has slowed somewhat as targets and buyers try to determine the new normal.
We have gotten more specific about our targeted runways for acquisition growth and remain patient capital allocators.
I believe more opportunities will become available at better values than are currently being sought by many targets.
And lastly, lumber market pricing, which appears to be fairly stable for the near term.
Now, let's review segment performance and outlook.
In the retail solutions space as a value added manufacturer seller in south distributor our products provide solutions for the DIY consumer as well as the professional contractor.
Our retail solutions segment continues to refine its strategies and organization and has developed a plan to consolidate its business around three main business units.
<unk> decorators and UFP edge.
Some of the macro factors affecting retail are one the repair and remodel revenue is expected to be down 3% for 2023.
To lumber market is significantly lower than 2022, resulting in lower sales dollars.
<unk> consumer confidence level is 10 points below the historical average.
On the positive side 24 million homes will reach prime remodel years by 2027.
The fact that fewer homes are available for sale has helped bolster new construction, which helps construction and to a lesser extent retail solutions.
And repair and remodel spending is expected to pick up again in 2024 and 2025.
In the second quarter Pro and Sunbelt sales were stronger than anticipated with unit sales up 2% overall and up 8% with big box customers.
While still well below our reasonable targets margins improved significantly from a terrible levels in the second quarter of 2022.
The team continues to strengthen its focus on building the <unk> brand and using its performance solutions product development team to create better treatments, which enhance the performance appearance and durability of wood products.
Decorators is expanding its product development team to speed innovation to market using its patented mineral based technology, which has considerable opportunities for growth.
Just last week the board approved an additional $31 million in capital expenditures to further expand capacity by approximately $90 million, while increasing efficiency and material utilization.
And we now have over 900 certified decorators installers.
We will continue to be the greatest cheerleaders for the products.
Overall, our retail solution strategy is simple provide innovative new products and solutions.
Find expand and harness opportunities.
Select and build the right brands.
And utilize our national reach purchasing expertise and distribution network to provide the best customer value.
And the construction segment. The site built business unit has performed very well in a down market and has been able to grow our multifamily business to help fill production.
We are currently operating near functional capacity in many of our site built facilities.
We are serving our existing customer base extremely well and we have added sales focus on new customers and new products.
The site built team aims to be different by challenging the conventions in the industry and developing more innovative products and utilizing more innovation to help solve customer challenges.
We are implementing the newest technology innovation and one of our facilities and we'll be monitoring the results before we expand it to others.
We are consolidating an existing facility in Belgium, Massachusetts into our new Chicopee, Massachusetts facility, which has a much larger footprint and double the capacity to better serve customers in the new England and nearby markets.
And the factory build business unit, they experienced dramatic sales declines as customer volumes declined and lumber prices remain much lower than last year.
For example, the RV industry production is down over 50%, although we still believe we have growth opportunities in that market. Since it is such a low percentage of our overall sales.
We have created a new brand for RV products called recreate.
This business unit is growing and the new product portfolio to drive value added for our customers.
We also believe the outlook for factory built should improve in the second half of 2023 as dealer inventories get more in line with demand.
Again overall for construction, we will rely on our experienced management team to guide the business through any uncertainty and to continue to produce strong results.
In the packaging segment structural packaging is continuing its path towards standardization at its facilities since the restructuring.
We expect to gain more efficiencies in manufacturing engineering and sales as we drive a holistic approach across the organization rather than each facility being a jack of all trades.
Pallet, one has seen an oversupply of used pallets in the market, which has put pressure on new pellet pricing.
Customers, who have heavier inventory of high priced pallets will struggle in the near term.
And the competitors will also struggle.
The long term outlook for <unk> 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 some of the packaging runways to grow while others are down slightly.
Our estimate overall for packaging is down mid single digits and units.
On the international front, our team is growing their solutions offering to both our domestic customers in those countries as well as multinational customers operating in the countries we serve.
We continue to evaluate growth opportunities in our existing markets to gain share and add to our portfolio.
Some other areas of interest or new products.
New product sales for the second quarter were $188 7 million and year to date were $352 7 million.
We are behind our annual target of $795 million due in large part to the lower level of the lumber market pricing.
New product development is an integral part of each business units strategic plan and our investments in innovation and acceleration should bear more fruit in the months and years to come.
Over 10 of our new product categories are each expected to generate more than $20 million in annual sales in 2023.
On the raw material side, the lumber market declined during the quarter and then started trending upward in the last few weeks of June we.
We do not expect significant volatility, especially when compared to prior years, Although we do expect that the mills are actively managing their supply side to strengthen their margins.
Inventory as we shift to more value added and higher margin items. We know that inventory turns are generally not as high for value added products as they are for commodity type products. We.
We are focused on having the right mix of products and inventory working with customers to improve forecasting and working with our supply chain to reduce the amount of safety stock we needed to have on hand.
Transportation has generally been more readily available although operating costs have remained at elevated levels.
And human capital.
Note that the U six unemployment index was up to six 9% at the end of June versus six 7% at the end of the first quarter.
More applicants are looking for work, but finding quality employees is still a challenge.
Our system of providing growth opportunities for internal candidates together with training and advanced education resonates well with our teams.
Signing additional incentive pay for hourly teammates to performance has been very well received and drives improved engagement and overall financial results.
We also continue to promote the next generation of leaders and train others to ensure that talent levels can match, our strategic growth plans.
Now I'd like to turn it over to Mike Cole to review the financial information.
Thank you Matt.
Our consolidated results. This quarter include a 30% drop in sales to $2 billion, consisting of a 22% reduction in selling prices, primarily due to the decline in lumber prices, we pass to customers and an 8% decrease in units.
A 32% drop in operating profit to 193 million.
Resulting in an overall decremental operating margin of 10, 7%, which was more favorable than the 15% to 20% range. We originally estimated for the year.
And adjusted EBITDA margin that improved by 50 basis points to 11, 5%.
Demonstrating the progress we've made since our management structure change in 2020, which enhanced our ability to offer new products and value added solutions to customers in each of our business units.
And annualized year to date return on invested capital of 25, 5%, which is two five times, our weighted average cost to capital.
$231 million improvement in operating cash flow compared to last year as lower volumes in lumber prices reduced our seasonal increase in working capital.
And the balance sheet that continues to gain strength with a net cash surplus of $425 million this year compared to net debt of $191 million last year.
By segment sales in our retail segment dropped 18% to $920 million, consisting of an 18% decline in selling prices and flat unit sales.
Given market conditions, our unit sales held up well this quarter, primarily driven by our pro would end decorators business units.
Our unit sales to big box customers were also up with an increase with an 8% increase for the quarter, while our business with independent retailers, which we believe is more closely correlated with new housing starts dropped by 16%, which was in line with expectations.
Our retail operating profit increased to over $60 million this year.
145% increase from last year.
Last year, our retail segment, which has a sales mix heavily weighted towards variable priced treated lumber was adversely impacted by sequential trends in lumber prices that dropped from over $1300 per thousand at the beginning of the quarter to less than $600 per thousand at the end of Q2.
Fortunately, we haven't had the same challenge in 2023.
At the beginning of this year, we indicated our retail segment was well positioned to report an increase in operating profit for the year.
There is strong performance in Q2 resulted in a $5 million increase in a year to date operating profits and we believe that this and we believe this segment is well positioned to build on this momentum in the back half of the year.
Moving on to packaging.
Sales in this segment dropped 28% to $488 million, consisting of a 21% decline in selling prices, a 9% organic unit decrease in acquisitions, which contributed 2% to unit volume.
Customer demand is currently softer than we anticipated at the beginning of this year, which has also contributed to competitive price pressure.
As a result of these and other factors operating profits in our packaging segment dropped to 57 million a 40% decrease from last year, resulting in a decremental operating margin of 19, 8% slightly better than the low end of the 20% to 25% range, we estimated for the year.
Also since most of the products we sell in this segment are at a fixed price for a period of time falling lumber prices contributed to higher profits per unit last year.
Sequential comparisons of sales and operating profits from Q1 to Q2 of 2023 provides us with cautious optimism that demand and pricing pressure in this segment has stabilized.
Turning to construction sales in this segment dropped 44% to $550 million.
Consisting of a 26% decline in selling prices and an 18% decrease in units.
As expected the unit decline was due to our site built and factory built businesses, whose units declined 14% and 20% respectively.
Lower volumes and more competitive pricing across the operating profits in our construction segment to drop to $62 million.
A 53% decrease from last year, resulting in a decremental operating margin of 16, 7%.
This was again better than the 20% to 25% range, we estimated for the year for the full year.
Last year in Q2 through Q4, the construction segment benefited from the drop in lumber prices I mentioned earlier, because its sales are more heavily weighted to products with selling prices that are fixed for a period of time peak.
Peak demand and capacity constraints also allowed the team to be more selective in the business, we pursued last year.
As we manage through this cycle in each segment continues to focus on executing our strategies to grow our portfolio of value added products.
And we're pleased to report an increase in our ratio of value added sales to total sales to 67% this year from 62% last year.
Similarly, our ratio of new product sales to total sales increased to 9% this year from 7% last year.
We're confident these efforts will continue to help us achieve our minimum EBITDA margin target of at least 10%.
And help us continue to enhance our profitability and competitiveness over the long term.
We're also mindful of our cost structure in this environment as we ensure the company is appropriately sized relative to demand, while still providing the resources needed to execute long term strategies that enhance our ability ability to offer value added solutions and drive innovation.
Our SG&A expenses came in under plan and declined nearly $10 million or 5% this quarter, primarily due to lower bonus and sales incentive expenses.
Moving onto our cash flow statement, our cash flow from operations was $321 million, a $231 million improvement over last year due to lower seasonal working capital requirements, resulting from lower volumes in lumber prices.
Our cash cycle for the quarter increased to 63 days. This year from 58 days last year due to a two day increase in our receivables cycle and a three day increase in our inventory cycle.
While the while we've experienced a slight delay in payments from certain customers. Our overall receivables are in good shape with over 93% current.
Our current our inventory cycle is above historical trend and is an area of focus as we reset our safety stock levels for the improvement in availability of supply and adjust for the impact of the lower demand environment.
Who did returning capital to our shareholders through more than $31 million of dividends and more than $55 million a share buyback so far in 2023.
Turning to our capital structure and resources, we continue to have a strong balance sheet with $425 million surplus cash in excess of debt compared to $191 million in net debt last year.
Our total liquidity was nearly $2 billion, consisting of surplus cash and availability under a credit facility and a shelf agreement with certain long term lenders.
The strength of our cash flow generation conservative approach to managing our capital structure and prudent returned driven approach to capital allocation continues to Brian provide us with an abundance of capital to grow our business and also to.
And also return to shareholders through different cycles.
We'll continue to pursue a balanced and returned driven approach between dividends share buybacks capital investments and M&A, specifically, our board approved a quarterly dividend of 30 cents a share to be paid in September which represents a 20% increase in the quarterly rate.
We have a new share repurchase program approved by our board of directors, providing us with the off authorization repurchase up to $200 million worth of shares until the end of July 2024.
We're currently planning for total capital expenditures of $175 million to $200 million. This year, which is lower than our original estimate due to long and variable lead times that continue to impact timing.
And we continue to pursue a healthy pipeline of M&A opportunities as we target companies that are a strong strategic fit and enhance our capabilities and competitive position, while providing higher margin returns and growth potential.
It's all I haven't the financial Smith.
Thank you, Mike now I'd like to open it up for questions.
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.
And your question <unk>, one one again, one moment, while we compiled the Q&A roster.
Our first question will come from the line of Kurt Hanger with da David send your line is open.
Great. Thanks, and good afternoon that Mike.
Hi, Kirk.
Just wanted to start off on retail I mean, it sounded like pro would sunbelt and decorators all had pretty good quarters, there, but volumes for flat could you just talk about some of the offsetting.
Business units segments, and and anything of note there.
Yeah, I would say, it's probably driven primarily by U S. P edge volumes were down considerably.
Got it and is that any destocking or anything specific or just.
I guess, the overall market environment.
Yeah, I think there's a couple of different factors. There. One is I think as we look at where are you <unk> going there driving it more towards their higher end products and less on some of the just pure finishings items. So that's going to help <unk>.
Help in the future, but it's it's got a sales impact that's happened this year so far so.
Got it okay that makes sense and then yeah.
He had a nice bounce back in retail gross margins, but I I think you reference that those were still below target levels and maybe you could just talk about what you think will kind of help bridge, maybe the pro lived in Sun belt business units specifically.
From where they are today to where you're kind of hoping to push too from a margin perspective.
Yeah, I think it's been a consistent struggle, we've we've talked about the value add that we believe is in our treated lumber products, both with our preservatives or fire retardant and some of the new treatments that we're developing within the performance formulation.
Solutions group and I think that will certainly help we saw through the pandemic that the unearned consumer is willing to pay a fair value for the product.
So from our standpoint, it's a matter of us, making sure that we're delivering the value and selling the value and that's a real big focus for us is to help drive that profile up.
Through through the customer base and ultimately for the consumer to give them, a better product better value, but a better margin for us.
Okay, and then just lastly.
I think your reference kind of be in that capacity in terms of.
Mm site built and I assume that's with kind of manufactured products and the like.
E.
Plans to kind of add greenfield facilities or any targeted kind of capacity expansion investments there.
Yeah, I think we as we talked a little bit about we talked about automation and one of our larger facilities, we talked about adding the chicopee, Massachusetts facility, we're looking at adding capacity in other areas.
So that certainly part of it I think.
We talked and I tried to differentiate a little bit between functional capacity, an actual capacity I think.
I know not all the facilities or run into shifts so adding a second shift is still a possibility for some of them but.
I think for US it's been a pleasant surprise that there's that much demand and so.
Who knows how long it'll stay that way, but we're very pleased with it so far and the outlook from our customers has been very strong as well.
Okay, well, thanks for that Mike and or sorry, Matt.
And good luck here in Q3, guys alright.
Alright, Thank you Curt thanks, Sir.
Thank you one moment sorry your next question.
And that will come from the line.
Elliot with Cecil Your line is open.
Hey, Matt Mike. Thank you guys for taking the question.
Okay.
Helmets on the site bill kind of going back to that.
Was that more multifamily that you're seeing a lot of the strength and then I guess the other part would be held.
How easy is it for you to flip these are not flip.
Switch over production that some of these facilities between single family in multifamily.
In the event that multifamily starts to tail off.
Yeah, that's a that's a good point I would say that.
The strength of multifamily is certainly benefactor for us I predicted incorrectly probably four years ago that multifamily would slow and it's still it's just stayed strong the demand is there for rental housing. So it's it's still got a strong place in the again the outlook their looks good.
With respect to how easy is it to switch production over.
At the risk of like irritating most of our production facilities I'm not gonna say, it's easy but.
But they do a really really good job of managing that transition and changeover.
The real challenge comes when customers need to delay starts or change starts.
And that's where it gets even more challenging it at the production level, because we have to move things around and shift schedules, but they've done a really really good job at our facilities are managing those and layering them in and.
So I'd give them a ton of credit for that.
Could you speak maybe a little more to the competitive pressures you guys saw on the packaging. It then I guess, there's another thing yeah. It looks like the <unk> to get a start but are in the bottoming process may be actually been improving by the end of the year.
Do you think you'll end up seeing that will there be a lag before that starts to benefit some of the the packaging businesses or should it be kind of more in line with how those pmi's track.
Yeah, there's a couple of different things going on there Stanley, which which make it more difficult to be precise, but I will tell you I think your points that on <unk>.
Probably be a slight lag there.
I think there's been a program that they've had in packaging for awhile, which is basically trying to convert from six in panels to value added products.
Maybe not take certain orders if they're not at certain levels I know, there's been more quoting activity at a number of areas, which is typical in this environment.
And so I think we've been doing very well with respect to the results of those types of things but.
That's created some of that competitive pressure I talked about and then he got a pallet side typically to the presence of a lot of excess cores on the market certainly can can dampen pricing for awhile and totals or absorb but I think the PMI index coming back that.
That certainly shows a good sign for the future and I think that.
Take away that I have for the packaging group as they've done a nice job of managing their overall margins in business mix.
By the fact that that a sales volumes are down.
And then lastly, any thoughts on the cadence the repurchase activity yeah. It was it.
The additional 200 is only for this year, how should we think about that.
Really for the next 12 month period, and so we'll continue to do what we've tried to do in the past we want to make sure that.
The valuations are right, we want to allocate capital to where the highest return is in.
Certainly there's times.
Within the second quarter, you saw that where the value of our stock far exceeded anything else, we could invest in so.
To the extent those opportunities are there we wanted to have the approval of the board to be able to go ahead and repurchase.
Perfect. That's it from me thanks, so much and best of luck.
Thank you Thanks man.
Thank you one moment for our next question.
That will come from the line of Keeton Montoya with BMO capital might get your line is open.
Thank you now could <unk>, Mike Thanks for taking my statement.
First question I was just curious might be talked about you know your big boxes.
High single digits on the independent retailer side, if those kind of down mid teens as I <unk> as I think about you know <unk> you guys are getting better I haven't seen any signs died not that sort of thing.
Leah comps.
Are are changing as you move through the back half given that <unk> <unk> it seems to be holding a better on there wasn't positive indicators.
From a year over year standpoint.
We're still looking at the <unk> strong within retail, which is what you're talking about I think I would make sure to point out though that we do have a significant seasonal change that occurs from 222.
Q3, and Q4 so that I would expect to kind of revert back to more normal historical patterns, so with respect to seasonality, but year over year, we still feel like demand as in as in good shape and speculate some of that may be due to higher.
Higher lumber prices over the last couple of years and people deferring projects and so I think that in some other factors are contributing to repair remodel activity. That's that's been better than we expected.
Gotcha, Okay, and then as I think.
Think about capital allocation, obviously balance sheet as in as in Bay strong shape. You know you talked about Chetti purchases I'm curious as you think about <unk>, you know kind of <unk>. Most interesting opportunities has you know kind of apologist Hello expectations kind of Margaret there then.
You think about the three segments has a relative attractiveness of <unk> kind of increased.
Whether it's technical factors or or anything else.
Yeah, I guess, what I would say Keaton as I think packaging has been the area, where we've had the most focus and the most opportunities. That's obviously a highly fragmented marketplace. So for us that that would be a much easier.
Combination to work through and there's more opportunities in that space.
And the other segments I think we're very selective in what we're looking at and they have to be able to drive synergies and scale in some form or fashion for us or create a new product idea a new product innovation that we can scale across our network.
So I think you're right on the capital and we talked a little bit about the evaluations and.
Think right now people are still not quite where they need to be in terms of what I think real values are going forward. That's there waiting for somebody.
Somebody come in and pay them, what they might've been worth a year and a half ago or two years ago. So I think.
There's a little ways to go there, but we are very confident that there will be some opportunities.
In our wheelhouse and add values that fit our model.
Gotcha and one final question, Mike any repaint, our update for us in terms of how you think about.
Detrimental margins in in your statement you know.
Based on kind of what you've seen so far.
Yeah.
It's a good question, we have and and we're taking a fresh look at that guidance that we've provided in the foreword outlook of our of our 10-K and 10-Q last four and so that'll be updated next week, when we file but I would I would tell you that.
Would it surprise you that you will likely lower the construction Ah detrimental margin given the performance and how we see the back half of the year materializing I'm going to guess that the packaging is.
That range might change, but it's probably closer to that original range and probably expect to do a little better on the on the detrimental margin and therefore overall retails pretty much doing exactly what we thought we we did we we're finally up compared to last year.
On profits and I think we'll build on that in the back half of the year.
Alright, I know that's very helpful. I I've done it to look good luck in the back half.
Thank you. Thank you.
Thank you I'm showing no further questions in the queue at this time I would like to turn the call back How's it going Mr. Matt massage for any closing remarks.
Well. Thank you again for spending time with us today.
While there are many challenges and unknown, we face our experienced team gives me confidence to paraphrase. The words of one Republic I'm not worried about it right now because we'll keep the dreams alive.
Thank you for your investment in Us and we'll keep working to ensure great long term returns have a great day.
Thank you all for participating this concludes today's program you made it disconnect.
Mmm.
[music] [music].
[music].
[music].
[music].