Q3 2023 UFP Industries Inc Earnings Call
Good day and welcome to the Q3 2023 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 to.
Press Star one one on your telephone you will then hear an automated message advising your hand is raised 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> Coffee Air Vice President of Investor Relations. Please go ahead Sir.
Welcome to the third 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 web cast.
At USPI Dot Com a replay will also be available at that website 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 Dirk and good morning, everyone. We appreciate you joining our third quarter 2023 earnings call.
The third quarter demonstrated that structural changes we made in the business have also created structural changes in our operating margin.
As we look at a more normalized pre pandemic style economy, we are focused on structural enhancements to our business to secure our spot in the value chain to drive profitable growth and to create more shareholder value.
The financial results of the third quarter were in line with our overall internal forecast and we are grateful for the scale experience and the hard work of our team.
We know we have more work to do and more opportunity to drive positive change and our results.
As always we continue to face uncertainties in the economy and in recent weeks, we saw a slowdown in different parts of our customer base.
We felt those effect more acutely in our packaging segment.
Our earnings of $2 10 per share exceeded our internal forecast and EBITDA margins remained above 11% in spite of lower sales volumes in a slower economy.
We have accumulated a $900 million war chest to take advantage of the opportunities we expect to come our way when acquisition targets have higher interest expenses and more normalized sales environments to contend with.
And while we might be tempted to force capital spending like drunken sailor I'm reminded of the words of Chandler Bank, who said you have to stop the Q tip. When there is resistance.
So we will continue to be prudent and patient in our capital allocation and follow the path to the best return for our shareholders.
Return on investment remains our guiding principle.
Rather than going in depth on financial performance, which Mike will cover later in the call I would like to look at some of the macroeconomic indicators that affect US review the expected impact to our business units and segments and share a few opportunities for investing in our future.
First as interest rates.
I'm not sure if there are too many cooks in the monetary policy kitchen, but it appears to me that instead of treating interest rates like slowly simmered pasta sauce and having patients.
Scott anxious and made microwave ketchup instead.
We will have to wait and see what happens next and react accordingly.
And housing along with the rise in short term rates mortgage rates are now pushing 8% and a vast majority of homeowners have existing mortgages of less than three 5%, which makes it difficult for many homeowners to justify a move.
Single family home sales have been resilient and part due to the lack of existing home resales.
Operator: Good day, and welcome to the Q3 2023 USP Industries Inc. Ernie's conference column webcast. At this time, all participants are in a listen only mode.
Inflation and consumer debt.
Inflation remains elevated as policymakers seem to prefer adding cost to consumers by making energy costs and all related consumer costs higher naturally that slows the economy and hurts all consumers, particularly those who can least afford it.
Operator: After the speaker presentation, there will be a question and answer session. To ask the questions during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. So withdraw your question, press star 1-1 again.
This contributes to the all time record high credit card debt.
Operator: Please be advised that today's conference is being recorded.
Now in February 2023, we advise that 2023 would not be a smooth year with business slowing in the second half and perhaps a rate drop in Q4.
Dick Gauthier: I would now like to hand the conference over to your speaker, Mr. Dick Gauthier, Vice President of Investor Relations. Please go ahead, sir. Welcome to the third quarter 2023 conference call for UFB Industries. Hosting the call today, our CEO, Matt Masad, and CFO Mike Cole. Matt and Mike will offer prepared remarks, and then the call will be open for questions. This conference call is available simultaneously in its entirety to all interested investors and news media through our webcast at ufpi.com. A replay will also be available at that website.
Our team executed their plans and has performed well under the circumstances, while investing in innovation and value added products.
I now believe we are off on our prediction by six months or so and that the slowdown will occur in 2024 and rate decreases are more likely to occur than as well.
We are used to facing uncertainties and are not afraid our teams will work. This road together through the storm whatever weather cold or warm.
Dick Gauthier: Before I turn the call over to Matt Masad, let me remind you that today's press release and presentation include forward-looking statements as defined in the Private Security's litigation reform act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the company's expectations and projections. These risks and uncertainties include but are not limited to those factors identified in the press release and in the filings with the Securities and Exchange Commission.
With these factors as a backdrop, let's look at the individual segment performance and outlook.
And retail solutions as a value added manufacturers stellar in south distributor our products provide solutions for the DIY consumer as well as the professional contractor.
Our brand consolidation around three product families is taking shape and I believe will not only improve our focus on each of these categories, but will also help with new product development value added product mix and better target our marketing spend.
Matt Masad: I will now turn the call over to Matt Masad. Thank you, Dick, and good morning, everyone. We appreciate you joining our third quarter 2023 earnings call.
In Q3, <unk> sales were in line and margins maintained a similar trend in the second quarter, which is better than a year ago, but still well below our reasonable margin targets.
Matt Masad: The third quarter demonstrated that structural changes we made in the business have also created structural changes in our operating margin. As we look at a more normalized pre-pandemic style economy, we are focused on structural enhancements to our business to secure our spot in the value chain, to drive profitable growth, and to create more shareholder value. The financial results of the third quarter were in line with our overall internal forecast and we are grateful for the skill, experience, and hard work of our team.
The team continues to strengthen its focus on building the <unk> brand and using its performance solutions chemical team to create better treatments and enhance the performance appearance and durability of its products.
Decorators again had solid right solid results in the.
In the third quarter and has an exciting plan to expand its product offerings when new capacity comes online next year.
Matt Masad: We know we have more work to do and more opportunities to drive positive change and our results. As always, we continue to face uncertainties in the economy and in recent weeks we saw a slowdown in different parts of our customer base. We felt those effects more acutely in our packaging segment. Our earnings of $2.10 per share exceeded our internal forecast and EBITDA margins remained above 11% in spite of lower sales volumes in a slower economy.
Finally, the UFP edge business unit is underperformed underperforming today, but it has made substantial changes in structure and go to market strategy, which we believe will build success going forward.
Big box retailers now expect that 2024, we will see unit volume declines in the area of 2% to 5% with a rebound expected in 2025 and 2026.
Regardless, we will pursue our strategy to provide innovative new products and solutions.
Matt Masad: We have accumulated a $900 million award chest to take advantage of the opportunities we expect to come our way when acquisition targets have higher interest expenses and more normalized sales environments to contend with. While we might be tempted to force capital spending like a drunken sailor, I'm reminded of the words of Chandler Bing who said, you have to stop the Q-tip when there is resistance. So we will continue to be prudent and patient in our capital allocation and follow the path to the best return for our shareholders. Return on Investment remains our guiding principle.
To find expand and harness new products and service opportunities to.
To select and build the right brands and to utilize our national reach purchasing expertise and distribution network to provide the best customer value.
And construction the site built business unit performed very well in Q3 again in a down market.
While our order files remained solid at present, we expect to softer demand in Q4 and during the first half of 2020 for most.
Most site built facilities are working their normal shifts now with little overtime.
Matt Masad: Rather than going in-depth on financial performance, which Mike will cover later in the call, I would like to look at some of the macroeconomic indicators that affect us, review the expected impacts to our business units and segments, and share a few opportunities for investing in our future. First is interest rates. I'm not sure if there are too many cooks in the monetary policy kitchen, but appears to me that instead of treating interest rates like slowly simmered pasta sauce and having patience, the cook's got anxious and made microwave ketchup instead.
With a desire to be different and better we continue to innovate and create competitive advantages with efficiency and supplying the most value added solutions are.
Our new facility in Chicopee, Massachusetts is now in operation and will be a model for future efforts at automation efficiency and innovation.
Factory build is still impacted by low unit volumes at the customer level.
The business unit is taking the opportunity to drive new products and solutions to both the manufactured housing market as well as taking share in the RV market.
Matt Masad: We will have to wait and see what happens next and react accordingly. In housing, along with the rise in short-term rates, mortgage rates are now pushing 8% and a vast majority of homeowners have existing mortgages of less than 3.5%, which makes it difficult for many homeowners to justify a move. Single-family home sales have been resilient in part due to the lack of existing home resales.
And the construction segment will rely on our experienced management team to guide the business through any uncertainty and to continue to produce strong results.
On the packaging side structural packaging has seen softer demand for many of its customers in the past quarter.
They will be consolidating product manufacturing rationalizing capacity using automation to drive more cost effective manufacturing.
Matt Masad: Inflation and consumer debt. Inflation remains elevated as policy makers seem to prefer adding costs to consumers by making energy costs and all related consumer costs higher. Naturally, this slows the economy and hurts all consumers, particularly those who can least afford it. This contributes to the all-time record-high credit card debt. Now in February 2023, we advise that 2023 would not be a smooth year with business slowing in the second half, and perhaps a rate drop in Q4.
In addition to manufacturing efficiencies, we expect to improve engineering sales and marketing as we drive a holistic approach across the packaging organization.
Rather than continuing to have each facility b, a jack of all trades.
Our sales efforts include leveraging our design expertise nationally and even globally to provide better solutions for our customers.
Matt Masad: Our team executed their plans and has performed well under the circumstances while investing in innovation and value-added products. I now believe we are off on our prediction by six months or so and that the slowdown will occur in 2024 and rate decreases are more likely to occur then as well. We are used to facing uncertainties and are not afraid. Our teams will walk this road together through the storm, whatever weather, cold or warm.
Pallet, one has felt pricing pressure as a result of an oversupply of used pallets.
Higher interest rates and storage costs will have heard some competitors, who have high inventories and are highly leveraged.
The long term outlook for UFP packaging remains strong.
We will continue to invest in automation innovation and acquisition to advance our goal of becoming the global packaging solutions provider.
From an economic outlook, we expect some more runways to grow while others slow.
Again, we are driving more rapid change in packaging to align our production with demand as well as providing.
Matt Masad: With these factors as a backdrop, let's look at the individual's segment performance and outlook. In retail solutions as a value-added manufacturer, seller and self-distributor, our products provide solutions for the DIY consumer as well as the professional contractors. Our grand consolidation around three product families is taking shape and I believe will not only improve our focus on each of these categories, but will also help with new product development, value-added product mix, and better target the marketing spend.
Combining product manufacturing in fewer locations to gain efficiencies.
On the international front during the third quarter, our international team completed the acquisition of pallets to layer in Spain to further its quest to be the global packaging solutions provider.
Other areas of focus and value include new.
New product sales.
Product sales for the third quarter were $176 5 million and year to date were $548 7 million.
Matt Masad: In Q3, pro-wood sales were in line and margins maintained a similar trend to the second quarter, which is better than a year ago, but still well below our reasonable margin target. The team continues to strengthen its focus on building the pro-wood brand and using its performance solutions chemical team to create better treatments and enhance the performance, appearance, and durability of its products. Decorators again had solid right, solid results in the third quarter and has an exciting plan to expand its product offerings when new capacity comes online next year.
We are running behind our annual target of $795 million due to due in large part to the lower level of the lumber market pricing.
We are beginning our annual review of new products Sunsetting and plan to raise the bar for continued inclusion as a new product.
Innovative new products are critical to our future success and we want to ensure that we are utilizing our capital on the best new opportunities.
Secondly growth has become more focused on strategic runways, and we continue to evaluate the best opportunities, whether they are M&A transactions or organic growth projects.
Matt Masad: Finally, the USP edge business unit is underperforming today, but has made substantial changes in structure and go-to-market strategy which we believe will build success going forward. Big-box retailers now expect that 2024 will see unit volume declines in the area of 2 to 5% with a rebound expected in 2025 and 2026. Regardless, we will pursue our strategy to provide innovative new products and solutions, to find expand and harness new products and service opportunities, to select and build the right brands, and to utilize our national reach, purchasing expertise, and distribution network to provide the best customer value.
M&A pipelines are not as robust, but we still believe the opportunities for good targets at reasonable values will become more achievable in a normalized economy and with rising future tax rates.
Third in addition to dividends and share repurchases capital will be deployed to drive more automation more innovation and providing better work environments in our facilities.
For human capital <unk>.
<unk> unemployment index was up to 7% at the end of September versus six 9% at the end of June.
We expect more applicants will be in the marketplace in the next quarter as well.
We continue to train and educate for more skilled positions as well as automating more manual labor functions.
Matt Masad: In construction, the site-built business unit performed very well in Q3, again, in a down market. While our order files remain solid at present, we expect a softer demand in Q4 and during the first half of 2024. Most site-built facilities are working their normal shifts now with little overtime. With the desire to be different and better, we continue to innovate and create competitive advantages with efficiency and supplying the most value added solutions.
We are investing in our next generation of leaders like the September graduation of 14, UFP business School students and the October graduation of 14 students in our advanced leadership program, all of whom will help us 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 first the 21% drop in sales to $1 8 billion, consisting of a 12% reduction in selling prices and a 9% decrease in units.
Matt Masad: Our new facility in Chickpea, Massachusetts is now in operation and will be a model for future efforts at automation, efficiency, and innovation. Factory build is still impacted by low-unit volumes at the customer level. The business unit is taking the opportunity to drive new products and solutions to both a manufactured housing market, as well as taking share in the RV market. And the construction segment will rely on our experience management team to guide the business through any uncertainty and to continue to produce strong results.
The decline in selling prices as a result of the drop in lumber and more competitive pricing in certain business units.
2nd% to 24% drop in adjusted EBITDA to $208 million and an adjusted EBITDA margin of 11, 4%.
Our adjusted EBITDA margin continues to stay well above our minimum target and pre pandemic levels. We.
We believe our team's commitment to grow our portfolio of value added products and our market focused management structure continued to contribute to the structural improvement in our margins.
Matt Masad: On the packaging side, structural packaging has seen softer demand for many of its customers in the past quarter. They will be consolidating product manufacturing, rationalizing capacity using automation to drive more cost-effective manufacturing. In addition to manufacturing efficiencies, we expect to improve engineering, sales, and marketing as we drive a holistic approach across the packaging organization rather than continuing to have each facility be a jack of all trades. Our sales efforts include leveraging our design expertise nationally and even globally to provide better solutions for our customers.
Third a trailing 12 month return on invested capital of 24% nearly two five times, our weighted average cost to capital.
Next $179 million improvement in operating cash flow to 712 million as lower volumes in lumber prices reduced our investment in networking capital.
And finally in balance sheet that continues to gain strength with a net cash surplus of $682 million this year compared to $128 million last year.
By segment sales in our retail segment dropped 16% to $711 million, consisting of a 9% decline in selling prices and a 7% decline in unit sales.
Matt Masad: Palette 1 has felt pricing pressure as a result of an oversupply of used palettes. Higher interest rates and storage costs will hurt some competitors who have high inventories and are highly leveraged. The long-term outlook for UFP packaging remains strong. We will continue to invest in automation, innovation, and acquisition to advance our goal of becoming the global packaging solutions provider.
Given the more challenging market conditions, our unit sales held up well this quarter, driven primarily by our <unk> and decorators business units, which each experienced slight declines.
Our unit sales to big box customers were up 1% for the quarter, while our business with independent retailers, which we believe is more closely correlated with new housing starts dropped by 22%.
Matt Masad: From an economic outlook, we expect some runways to grow while others slow. Again, we are driving more rapid change in packaging to align our production with the man, as well as providing combining product manufacturing in fewer locations to gain efficiency.
Our retail operating profits increased over $45 million this year of 57% 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 southern yellow pine prices that dropped from nearly $200 per 1000 at the beginning of April to almost $500 at the end of Q3.
Matt Masad: on the International Front during the third quarter our international team completed the acquisition of pellets who are in Spain to further its quest to be the global packaging solutions provider. Other areas of focus and value include new product sales, new product sales for the third quarter where 176.5 million and year-to-date were 548.7 million. We are running behind our annual target of 795 million due to doing large part to the lower level of the lumber market pricing.
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.
The strong performance. So far has resulted in a $22 million year to date increase and we believe retail is well positioned to build on that progress in Q4.
Moving on to packaging sales in this segment dropped 23% to $450 million, consisting of a 16% decline in selling prices and a 9% organic unit decrease.
Matt Masad: We are beginning our annual review of new product sunsetting and plan to raise the bar for continued inclusion as a new product. Innovative new products are critical to our future success and we want to ensure that we are utilizing our capital on the best new opportunities. Secondly, growth has become more focused on strategic runways and we continue to evaluate the best opportunities whether they are M&A transactions or organic growth projects. M&A pipelines are not as robust but we still believe the opportunities for good targets at reasonable values will become more achievable in a normalized economy and with rising future tax rates.
These decreases were partially offset by acquisitions, which contributed 2% to unit volume.
With respect to selling prices customer demand continues to be softer than we anticipated, which has contributed to more competitive pricing.
As a result of these and other factors operating profits in our packaging segment dropped to 41 million or 46% decrease from last year, resulting in a decremental operating margin of nearly 27% this quarter as we continue to see volume and competitive price pressure.
Matt Masad: Third, in addition to dividend and share repurchases capital will be deployed to drive more automation, more innovation and providing better work environments in our facilities. Fourth, human capital. The U6 unemployment index was up to 7% at the end of September versus 6.9% at the end of June. We expect more applicants will be in the marketplace in the next quarter as well. We continue to train and educate for more skilled positions as well as automating more manual labor functions.
We expect these trends to continue into Q4.
Turning to construction.
Sales in this segment dropped 25% to $584 million, consisting of a 12% decline in selling prices and a 13% decrease in units.
As expected the unit decline was due to our site built and factory build businesses, whose units declined 15, and 8% respectively, resulting from a decline in starts and industry production.
Lower volumes and more competitive pricing caused the operating profits in our construction segment to drop to $70 million or 37% decrease from last year, resulting in a decremental operating margin of nearly 21% this quarter.
Matt Masad: We are investing in our next generation of leaders like the September graduation of 14 UFP business school students and the October graduation of 14 students in our advanced leadership program all of whom will help us ensure that talent levels can match our strategic growth plans.
Given the higher interest rate environment, we anticipate the pressure on volume and pricing to continue into Q4.
As we manage through this cycle. Each segment continues to focus on executing our strategies to grow our portfolio of value added products and we're pleased to report an improvement in our year to date ratio of value added sales to total sales to 68% this year from 62% last year.
Mike Cole: Now I'd like to turn it over to Mike Cole to review the financial information. Thank you, math.
Mike Cole: Our consolidated results this quarter include first the 21% drop in sales to 1.8 billion consisting of a 12% reduction in selling prices and a 9% decrease in units. The decline in selling prices is a result of the drop in lumber and more competitive pricing in certain business units. Second, a 24% drop in adjusted EBITDA to 208 million and an adjusted EBITDA margin of 11.4%. Our adjusted EBITDA margin continues to stay well above our minimum target and pre-pandemic levels.
Similarly, our year to date ratio of new product sales to total sales improved to nine 6%. This year from seven 3% last year.
We're confident these efforts will not only help us maintain the structural improvements in margins, we've realized to date, but enable further improvements in our EBITDA margins over time.
We're also mindful of our cost structure in this environment is weak.
Ensure the company is appropriately sized relative to demand, while still providing the resources needed to execute long term strategies and enhance our ability to offer value added solutions and drive innovation.
Mike Cole: We believe our teams commitment to grow our portfolio of value added products and our market focused management structure continue to contribute to the structural improvement in our margins. Third, a 2012 month return on investing capital is 24%, nearly two and a half times our weighted average cost to capital. Next, $179 million improvement in operating cash flow to $712 million. As lower volumes and lumber prices reduce our investment in networks.
Our SG&A expenses came in under plan and declined nearly $19 million or 5% this quarter.
Primarily due to lower bonus and other incentive expenses and a reduction in bad debt expense.
Sequentially from Q3 to Q4, we anticipate a typical seasonal reduction in SG&A as we move into the slower part of the year and our variable and incentive costs decline.
Mike Cole: Working Capital. And finally, a balance sheet that continues to gain strength with a net cash surplus of $682 million this year compared to $128 million last year.
Moving onto our cash flow statement, our cash flow from operations was $712 million.
Mike Cole: By segment, sales in our retail segment dropped 16% to $711 million, consisting of a 9% decline in selling prices and a 7% decline in unit sales. Given more challenging market conditions, our unit sales held up while this quarter, driven primarily by our Pro-Wood and Decorator's business units, which each experienced slight declines. Our unit sales to Big Box customers were up 1% for the quarter while our business with independent retailers, which we believe is more closely correlated with new housing starts dropped by 22%.
A $179 million improvement over last year as our investment in net working capital declined as a result of lower volumes in lumber prices we.
We anticipate further reductions in net working capital in Q4.
Our cash cycle for the quarter decreased to 62 days. This year from 63 days last year due to a slight improvement in our days supply of inventory.
Our overall receivables remained healthy with over 94% current.
Our investing activities included $131 million and capital expenditures.
Mike Cole: Our retail operating profits increased over 45 million this year of 57% increase from last year. Last year, our retail segment, which has a sales mix heavily weighted toward variable price treated lumber, was adversely impacted by sequential trends in southern yellow time prices that dropped from nearly $1200 per thousand at the beginning of April to almost $500 at the end of Q3. 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 profits for the year. The strong performance so far has resulted in a $22 million U to date increase, and we believe retail is well-positioned to build on that progress into Q4.
Our expansionary investments our current merely focused on four key areas.
First expanding our capacity to manufacture new and value added products, primarily in our structural packaging protective packaging and decorators business units.
Second geographic expansion in our core businesses.
Third achieving efficiencies through automation.
And lastly, increasing our transportation capacity.
As we continue to transform this function from a cost center to a profit center.
We also spent 52 million to acquire talent through there a leading manufacturer of machine build pallets in Spain that gives us an attractive runway for future growth.
Finally, our financing activities included returning capital to our shareholders through almost $50 million in dividends and more than $62 million of share buybacks. So far in 2023.
Mike Cole: Moving on to packaging, sales in this segment dropped 23% to $450 million, consisting of a 16% decline in selling prices and a 9% organic unit decrease. These decreases were partially offset by acquisitions, which contributed 2% to unit volume. With respect to selling prices, customer demand continues to be softer than we anticipated, which is contributed to more competitive pricing. As a result of these and other factors, operating profits in our packaging segment dropped to $41 million. A 46% decrease from last year resulted in a detrimental operating margin of nearly 27% this quarter, as we continue to see volume and competitive price pressure. We expect these trends to continue into Q4.
Turning to our capital structure and resources, we continue to have a strong balance sheet with $682 million in surplus cash in excess of debt compared to $128 million last year.
Our total liquidity was $2 2 billion, consisting of surplus cash and availability under our credit facility and a shelf agreement with certain long term lenders.
With respect to capital allocation, we continue to pursue a balanced and return driven approach.
Dividends share buybacks capital investments and M&A.
Specifically, our board approved a quarterly dividend of <unk> 30, a share to be paid in December which represents a 20% year over year increase in the quarterly rate.
Mike Cole: Turning to construction, sales in this segment dropped 25% to $584 million, consisting of a 12% decline in selling prices and a 13% decrease in units. As expected, the unit decline was due to our slight build and factory build businesses, whose units decline 15 and 8% respectively, resulting from a decline in starts and industry production. Lower volumes and more competitive pricing caused the operating profits in our construction segment to drop the $70 million.
Share repurchase program. Our board approved in July provides us with authorization to repurchase up to $200 million worth of shares until the end of July 2024.
Since the approval, we repurchased almost 212000 shares at an average price of $97 87.
Resulting in a $179 million in remaining authorization.
We continue to plan for capital expenditures of $175 million to $200 million this year.
And finally, our balance sheet and allows us to continue to pursue a pipeline of M&A opportunities will continue to target companies that are a strong strategic fit and enhance our capabilities and competitive position, while providing higher margin return and growth potential its all I have.
Mike Cole: A 37% decrease from last year resulting in a detrimental operating margin of nearly 21% this quarter. Given the higher interest rate environment, we anticipate the pressure on volume and pricing to continue into Q4. As we manage through this cycle, each segment continues to focus on executing our strategies to grow our portfolio of value-edited products. We're pleased to report an improvement in our year-to-date ratio of value-edited sales to total sales to 68% this year from 62% last year, last year.
On the financials Matt.
Thank you Mike now I'd like to open it up to any questions that you may have.
Mike Cole: Similarly, our year-to-day ratio of new product sales to total sales improved to 9.6% this year from 7.3% last year. We're confident these efforts will not only help us maintain the structural improvements in margins we've realized today, but enable further improvements in our EVA dot margins over time. We're also mindful of our cross-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, then enhance our ability to offer value-edited solutions and drive innovation.
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 Press Star one again.
A moment, while we compile the Q&A roster.
Our first question will come from the line of Julio Romero with Sidoti <unk> Co. Your line is open.
Thank you Hey, good morning, Matt, Mike and <expletive> Thanks for taking my questions.
Good morning.
Hey, so I wanted to maybe start on the packaging segment.
Can you maybe expand on the comments you gave earlier about structural packaging seeing.
Some softer demand any particular trends you can dig into particular customers or verticals, where you are seeing the drop off in was there may be a particular catalyst aside from the broader uncertainty that may be causing that.
Mike Cole: Our SG&A expenses came in under plan and declined nearly 19 million or 5% this quarter. Primarily due to lower bonus and other incentive expenses in a reduction in bad debt expense. Sequentially from Q3 to Q4, we anticipate a typical seasonal reduction in SG&A as we move into the slower part of the year and are variable and incentive cost decline.
Yes, it's a good question I think where we're at is there is it kind of vary across different customer basis is just a general slowing which I would target is more of an economic overall economic slowdown there is some some of the customer bases that are still doing very well many of them have just slowed.
Mike Cole: Moving on to our cash flow statement. Our cash flow from operations was 712 million, a $179 million improvement over last year as our investment in networking capital declined as a result of lower volumes in lower prices. We anticipate further reductions in networking capital in Q4. Our cash cycle for the quarter decreased to 62 days this year from 63 days last year due to its light improvement in our days supply of inventory. Our overall receivables remain healthy with over 94% current.
It.
It is nothing fundamental or structural long term I think it's just more general slowness in the economy.
Okay got it and then.
How is the initiative to pursue larger projects within packaging going and maybe can you talk to when you expect the benefits of some of those sales changes you made to hit the P&L from a timing perspective would that be 20.
24 vendor or maybe further out than that.
Mike Cole: Our investing activities included $131 million in capital expenditures. Our expansionary investments are primarily focused on 4 key areas. First, expanding our capacity to manufacture new and value-edited products primarily in our structural packaging, protective packaging, and decorators business units. Second, geographic expansion in our core businesses. Third, achieving efficiencies through automation and lastly increasing our transportation capacity as we continue to transform this function from a cost center to a profit center. We also spent 52 million to acquire pallets who are a leading manufacturer of machine-built pallets in Spain that gives us an attractive runway for future growth.
Yes, I think youll start seeing some of that in kind of first quarter 'twenty four and the bulk of it will probably hit later in 2004 as you know the selling process tends to take longer with these larger projects.
But we're very optimistic that our team is going to obtain new business and additional business and national with our national customer base. So you probably won't see it until like I said first part of 'twenty, four and the bulk and the.
Balance of 24.
Okay. That's very helpful. And then just last one for me would be just on the balance sheet. You said, you've as you said you have a war chest of almost 1 billion in cash, but also you mentioned an M&A pipeline.
Not as robust currently so.
Mike Cole: Finally, our financing activities included returning capital to our shareholders through almost 50 million of dividends and more than 62 million of share buybacks so far in 2023. Turning to our capital structure and resources, we continue to have a strong balance sheet with 682 million in surplus cash in excess of debt compared to 128 million last year. Our total liquidity was 2.2 billion consisting of surplus cash and availability under our credit facility and a shelf agreement with certain long-term lenders.
Given the fact you guys are always invested prudently with ROIC in mind would you just continue to kind of build that cash balance if nothing changes or.
Where does the cash balance allow you to maybe play in a larger sandbox from a from an inorganic growth perspective.
Yes, I think theres a lot of options available in the challenge as we mentioned as we want to maintain our prudent in how we allocate that capital.
We have the ability to repurchase shares.
And again the way we look at it is trying to use the return on invested capital as our guide so whatever provides us with the best return not just immediate but longer term return, that's where we'll allocate that capital.
Mike Cole: With respect to capital allocation, we continue to pursue a balanced and return driven approach between dividends, share buybacks, capital investments, and M&A. Specifically, our board approved the quarterly dividend of $0.30 a share to be paid in December which represents a 20% year-over-year increase in the quarterly rate. Share Repurchase Program, our board approved in July, provides us with authorization to repurchase up to 200 million worth of shares until the end of July 2024.
We have a number of opportunities and when we talk about the pipeline being smaller part of that is due to us being more focused on the runways as opposed to looking at everything.
Mike Cole: Since the approval, we repurchased almost 212,000 shares at an average price of $97.87, resulting in 179 million in remaining authorization. We continue to plan for capital expenditures of 175 to 200 million this year, and finally our balance sheet allows us to continue to pursue a pipeline of M&A opportunities. We'll continue to target companies that are a strong strategic fit and enhance our capabilities and competitive position while providing higher margin return and growth potential.
The other part of it is frankly, a timing issue that I believe is going to become a little easier as people come off of the <unk>.
Pandemic highs in sales and profitability and kind of adjust to the new normal of what their future returns will look like as well and then the last piece that I added was on the income tax rates, which will increase automatically in 25 I believe so.
Mike Cole: It's all I have on financials now.
As may helped drive some of the sellers decisions.
I appreciate the color there I'll pass it along thanks very much.
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.
Matt Masad: Thank you, Mike. Now I'd like to open it up to any questions that you may have.
Great. Thanks, and good morning, everyone.
Good morning, Kurt Kurt.
Obviously, a lot of volatility from the impact and changes in lumber prices. The last couple of years, but I guess as you look across the segments and think about the normalization in pricing.
Operator: Thank you. As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. So, withdraw your question, press star 1-1 again, one moment while we compile the Q&A roster.
Kind of a leverage competitive pressures and relatedly gross margins I guess, what what kind of areas, whether its segments or business units do you feel like still have yet to bottom then.
Julio Romero: Our first question will come from the line of Julio Romero with Sedodianco. Your line is open. Thank you. Hey, good morning, Matt. Mike and Dick. Thanks for taking my questions. Good morning.
And you are kind of waiting to see that inflect in a positive way.
Matt Masad: We're up.
Matt Masad: Okay, so I wanted to maybe start on the packaging segment. Can you maybe expand on the comments you gave earlier about structural packaging, seeing some software demand, any particular trends you can dig into, particular customers or verticals where you're seeing the drop-off, and was there maybe a particular catalyst aside from the broader uncertainty that's maybe causing that? Yeah, that's a good question. I think where we're at is there's kind of very across different customer bases.
Yes, I guess the way we're looking at occurred as that would take an overall view of the sales are down pretty dramatically year over year, a lot of that is lumber market related.
But the part that I take encouragement then is that overall, if we look at historical EBITDA margins. For example, we're at a much.
Higher plateau than we've been in the past and I think thats.
Really our focus we understand that market space low the economy may slow.
But being able to continue to work on our margins and keep our margins at a higher than.
Matt Masad: It's a general slowing, which I would target as more of an economic overall economic slowdown. There's some of the customer bases that are still doing very well. Many of them have just slowed and it's it's nothing that's fundamental or structural long-term. I think it's just more general slowness in the economy.
Historical level is really critical for us.
And using the value added product mix and focusing on those areas is how we're going to combat it.
I'd also add that if you look specifically at the segments.
Packaging is shown.
Matt Masad: Okay, got it. And then how is the initiative to pursue larger projects within packaging going and maybe can you talk to when you expect the benefits of some of those sales changes you made to hit the P&L from a timing perspective? Would that be a 24-event or maybe further out than that? Yeah, I think you'll start seeing some of that in kind of first quarter, 24, and the bulk of it will probably hit later in 24.
As shown a little more softness relative to where they were.
Housing starts are at a lower level for sure, but we're still able to perform well at that level.
Never know whats going to happen with interest rates and what the economy is going to do on those factors, but our ability to scale up and down to meet whatever the actual demand is I think is really going to be critical and I'm really confident that our team can do that as well as anyone.
Matt Masad: As you know, the selling process tends to take longer with these larger projects, but we're very optimistic that our team is going to obtain new business and additional business and national with our national customer base. But you probably won't see it until, like I said, first part of 24 and the bulk and the balance of 24. Okay, that's very helpful.
Got it.
Thanks for that.
And then on retail volume trends those were.
Weaker than at least I expected.
Okay.
Mike I know you touched on some color on kind of the different business units, but maybe you could provide a little bit more meat, there, particularly around what's going on with edge and what you think is kind of driving some of that underperformance.
Matt Masad: And then just last one for me would be just on the balance sheet, you said you have a war chest of almost a billion in cash, but also you mentioned an M&A pipeline that's maybe not as robust currently. So given the fact you guys have always invested prudently with ROIC in mind, would you just continue to kind of build that cash balance if nothing changes, or just a cash balance that allow you to maybe play in a larger sandbox from any organic growth perspective?
Sorry, if I missed it but in regards to expectations into Q4, how are you thinking about that segment.
Yes.
There's no doubt the edge business unit is what contributed to us going Glenn going difficult on the comparisons in the unit shipments this quarter expect and they're going through a massive they are kind of going through a reboot process in that business unit and we are confident in our long term.
Matt Masad: Yeah, I think there's a lot of options available and the challenges as we mentioned is we want to maintain our prudence in how we allocate that capital. We have the ability to repurchase shares and again, the way we look at it is trying to use the return on invested capital as our guide. So whatever provides us with the best return, not just immediate but longer term return, that's where we'll allocate that capital.
I do expect the trends that we saw this quarter for retail from a demand standpoint to continue.
Listening to our customers talk about business.
In the near future, they're mentioning low single to mid single digit declines in business. So I think.
So I think there's still a little more to come there and.
I mean, thats, probably also true on the other the other business units as well and going back to the last question.
Matt Masad: We have a number of opportunities and when we talk about the pipeline being smaller, part of that is due to us being more focused on the runways as opposed to looking at everything. The other part of it is frankly a timing issue that I believe is going to become a little easier as people come off of the pandemic highs and sales and profitability and kind of adjust to the new normal of what their future returns will look like as well.
It's still probably a little bit of pressure on the packaging side and certainly with the higher interest rates expect those trends to continue on the construction side next quarter or two.
Got it okay.
Then just lastly on decorators I mean, that's been a terrific business for you guys in the past several years as you look into next year with with more capacity at your disposal I guess what are the key pieces to the strategy to continue to gain share in that category is it focused on the <unk>.
Matt Masad: And then the last piece that I added is on the income tax rates, which will increase automatically in 25, I believe. So those may help drive some of the seller's decisions. Appreciate the clue there. I'll pass it along. Thanks very much. Thank you.
<unk> and converting shelf space is it working with new contractors, how do you keep pushing that business forward.
Yes, it's a good question Kurt I guess, we rely very heavily on our certified professional installer base to be our best brand advocates so.
Operator: One moment for our next question.
Kurt Yinger: And that will come from the line of Kurt Yinger with DA Davidson. Your line is open. Great. Thanks. And come on, everyone. Good morning, Kurt. Obviously a lot of volatility from the impact and changes in lumber prices the last couple of years, but I guess as you look across the segments and think about normalization and pricing. Kind of leverage competitive pressures and and relatedly gross margins.
Continuing to market the product to create more consumer awareness of the brand.
It's something that we're committed to.
We also believe and I alluded to some new products that we can make using the technology that we're very excited about which will certainly enhance not just short term, but long term growth potential of that product. So that's why the capacity is helpful. Because we haven't really been able to launch new products because.
Matt Masad: I guess what kind of areas, whether it's segments or business units, do you feel like still have yet to bottom and you're kind of waiting to see that inflecting a positive way? Yeah, I guess the way we're looking at it, Kurt, is that would take an overall view. The sales are down pretty dramatically year over year. A lot of that's lumber market related. But the part that I take encouragement in is that overall if we look at historical EBITDA margins, for example, we're at a much higher plateau than we've been in the past.
We've been utilizing the capacity for existing products.
So those would be two factors that I would say are going to help drive it we are getting more traction with some.
Existing dealers and I think there is still more big box opportunity to come as well.
Got it okay, well I appreciate the color guys and good luck here in Q4.
Thank you.
Thank you one moment our next question.
And that will come from the line of Keith <unk> with BMO capital markets. Your line is open.
Matt Masad: And I think that's really our focus. We understand that markets may slow the economy may slow, but being able to continue to work on our margins and keep our margins at a higher than historical level is really critical for us. And using the value of product mix and focusing on those areas is how we're going to combat it. I'd also add that if you look specifically at the segments, packaging has shown a little more softness relative to where they were.
Thank you good morning, Matt Mike.
Okay.
Maybe just two.
Scott just stepping back here, a little bit I'm, just curious to get your startup.
In a big picture thoughts in terms of how some of these businesses are performing I mean, if you look at the economy GDP is quite strong yet packaging is seeing some softness.
Residential has held up relatively okay yet.
Mortgage rates are at multi decade high. So can you talk about kind of the puts and takes.
<unk> see it in <unk>.
Matt Masad: Housing starters are at a lower level for sure, but we're still able to perform well at that level. You just never know what's going to happen with interest rates and what the economy is going to do in those factors, but our abilities scale up and down to meet whatever the actual demand is. I think it's really going to be critical. And I'm really confident that our team can do that as well as anyone. Thanks for that.
Okay are you surprised with how some of these trends have evolved or.
Anything else that you'd like to highlight.
Yes, that's a really good question Keith.
Would start with is.
We're probably being unfair to the packaging group in terms of how we look at it.
Performance is being compared to pandemic era performance, which was off the charts. So I think if we go back and look at two.
2019 and before that.
The packaging returns have still been much better than they were back then and I think thats a fair trend line to look at so while theyre coming off of historic highs in terms of volumes and profitability I think they still have settled in at a level that's higher than historical for us. So.
Matt Masad: There are different business units, but maybe you could provide a little bit more meat there, particularly around what's going on with edge and what you think is kind of driving some of that under performance. And sorry if I missed it, but in regards to expectations and into queue for how are you thinking about that segment. Yeah, the there's no doubt that the edge business unit is what contributed to us going going going difficult on the comparisons and the unit shipments this this quarter expect and they're going through a less massive.
So while we will continue to push and prod and try to make sure that we're doing the best we can do.
They still have reached a higher elevation on their structure. So that's a plus.
The construction side the resilience of the housing market has been a pleasant.
Matt Masad: They're kind of going through a reboot process on that business unit and we're confident that I'm long term. I do expect that the trends that we saw this quarter for retail from a demand standpoint to continue when listening to our customers talk about business in the near future, they're mentioning both single to the single digit declines in business. So I think, so I think there's still a little more to come there.
A tailwind for us so I think thats, that's terrific and again as we've talked before.
The volume of housing starts as long as it's at a reasonable level, we can still be very profitable and do very well.
And it appears to me that it should stay within those ranges at least at present.
For the information we have.
And on the retail side I guess, what I would say is while some of the big box.
Matt Masad: And I mean, that's probably also through on the other, the other business units is well going back to the last question. Still probably a little bit of pressure on the packaging side and certainly with the higher interest rates expect those trends to continue on the construction side next quarter to. Got it. Okay.
Our customers are predicting a.
Maybe a 2% to 5% decline in volumes for 'twenty four.
They also predicted a down volume in 'twenty three.
And our product mix has benefitted our units are actually doing very well relative to what other products in the stores are doing so.
Matt Masad: And then just lastly on decorators. I mean, that's been a terrific business for you guys the past several years as you look into next year with with more capacity at your disposal. I guess what are the key pieces to the strategy to continue to gain share in that category? Is it focused on the dealers and converting shell space? Is it working with new contractors? How do you keep pushing that business board?
There is a bit of an anomaly that we have to be careful of in just because they are predicting down 2% to 5% that that may not be the same in our product categories.
But I would tell you Keith that.
It is a mixed bag so to speak and it's going to affect different markets differently, but overall I'm still very pleased that we're at a higher level than historical in terms of margins on the sales volumes that we had and I think we're well positioned as I said before to adjust to whatever the economy tends to throw our way.
Matt Masad: Yeah, it's a good question, Kurt. I guess we rely very heavily on our certified professional installer base to be our best brand advocates. So continuing to market the product to create more consumer awareness of the brand is something that we're committed to. We also believe and I alluded to some new products that we can make using the technology that we're very excited about which will certainly enhance not just short term but long term growth potential of that product.
<unk>.
Got it.
That's helpful and then.
Just one more from my side when you look at the site.
Smith.
And I understand seasonally Q4 is always slower right thats, just typical seasonality, but outside of that.
<unk> seen any signs of sort.
Things stabilizing at baby or are you seeing the pressure what are you hearing from your customers and if you can touch on both the R&D side on the multifamily side.
Matt Masad: So that's why the capacity is helpful because we haven't really been able to launch new products because we've been utilizing the capacity for existing products. So those those would be two factors that I would say are going to help drive it. We are getting more traction with some existing dealers and I think there's still more big box opportunity to come as well. Got it. Okay, we'll appreciate the color guys and good luck hearing you. Thank you. One moment for our next question.
Yes, so on the single family side I think there is a slight decline that's predicted.
On the multifamily from where we are we're looking at.
Pretty good order file through 'twenty, four probably more softness in 'twenty five.
And so that's that's the macro view.
I would tell you that in our markets.
And as you know we're not in all of the national market. So using national figures doesn't necessarily describe where we are so.
Ketan Mamtora: And that will come from the line of Ketan Mamtora with BMO capital markets. Your line is open. Thank you. Good morning, Matt Mike. Maybe just to start stepping back here a little bit. I'm just curious to get your sort of big picture of thoughts in terms of how some of these businesses are performing. I mean, if you look at the economy, GDP is still quite strong yet packaging is seeing some softness.
I would tell you that the mid Atlantic area has been very resilient and still is.
And Texas is still a good market.
State, New York and Colorado.
Or still kind of holding firm on where they are so that's obviously subject to change, but I would expect there to be some continued softness on single family starts or smaller homes, some way to make them more affordable.
Ketan Mamtora: New residential is held up relatively OK yet, you know, the mortgage rates are at multi decade high. Can you talk to about kind of the puts and takes as you guys see it in terms of, you know, are you surprised with how some of these trends have evolved or anything else that you'd like to highlight. Yeah, that's a really good question, Keaton. What I would start with is we're probably being unfair to the packaging group in terms of how we look at it.
In the near term.
Understood that's very helpful I'll jump back in the queue. Good luck.
Thank you.
Thank you 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.
Well. Thank you again for spending the time with US today, we really appreciate it.
As Felix Cardinal says nothing good is easy, but our team is strong and has faced much bigger challenges in the past and overcome them.
Ketan Mamtora: Their performance is being compared to pandemic era performance, which was off the charts. So I think if we go back and look at 2019 and before that, the packaging returns have still been much better than they were back then. And I think that's a fair trend line to look at. So while they're coming off of historic highs in terms of volumes and profitability, I think they still have settled in at a level that's higher than historical for us.
Thank you for your investment in Us and we'll keep working hard to ensure great long term returns.
Have a great day and go alliance.
Thank you for participating. This concludes today's program you may now disconnect.
Ketan Mamtora: So while we'll continue to push and prod and try to make sure that we're doing the best we can do, they still have reached a higher elevation on their structure. So that's a plus on the construction side, the resilience of the housing market has been a pleasant tailwind for us. So I think that's that's terrific. And again, as we've talked before, the volume of housing starts as long as it's at a reasonable level, we can still be very profitable and do very well.
Ketan Mamtora: And it appears to me that it should stay within those ranges, at least at present, for the information we have. And on the retail side, I guess what I would say is while some of the big box customers are predicting a, you know, maybe a two to five percent decline in volumes for 24, they also predicted a down volume in in 23. And our product mix has benefited we are units are actually doing very well relative to what other products in the stores are doing.
Yes.
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Ketan Mamtora: So there's a bit of an anomaly that we have to be careful of and just because they're predicted down to the five percent that that may not be the same in our product categories. But I would tell you, Keaton, that it is a mixed bag, so to speak, and it's going to affect different markets differently. But overall, I'm still very pleased that we're at a higher levels and historical in terms of margins on the sales volumes that we have.
Yes.
Mhm.
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Ketan Mamtora: And I think we're well positioned, as I said before, to adjust to whatever the economy tends to throw our way. Got it. Now that's that's helpful. And then, you know, my just one more from my side when you look at the site's business and I understand seasonally Q4 is always slow, right? That's just typical of seasonality. But outside of that, are you seeing any signs of, you know, sort of things stabilizing at Bay VR?
Okay.
Ketan Mamtora: Are you seeing for the pressure? What are you hearing from your customers? And if you can touch on both the community side and the multi-family side? Yes. So on the single family side, you know, I think there's a slight decline that's predicted on the multi-family from where we are. We're looking at pretty good order file through 24, probably more softness than 25. And so that's the macro view. I would tell you that in our markets, and as you know, we're not in all the national markets.
Ketan Mamtora: So using national figures doesn't necessarily describe where we are. So I would tell you that the mid-Atlantic area has been very resilient still is and Texas is still a good market upstate New York. And Colorado are still kind of holding firm on where they are. So that's obviously subject to change, but I would expect there to be some continued softness on single family starts or smaller homes, some way to make them more affordable in the near term. Understood. No, that's very helpful. I jump back in the queue. Good luck. Thank you. I'm showing no further questions in the queue at this time.
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Matt Masad: I would now like to turn the call back over to Mr. Matmosaud for any closing remarks. Well, thank you again for spending the time with us today. We really appreciate it. As Felix Carnell says, nothing good is easy, but our team is strong and has faced much bigger challenges in the past and overcome them. Thank you for your investment in us, and we'll keep working hard to ensure great long-term returns.
Operator: Have a great day and go Lions. Thank you for participating.
Operator: This concludes today's program.
Yes.
Operator: You may now disconnect. You You You[inaudible] He's the one who made it. He's the one who made it. [inaudible] made it. He's the one who made it. [inaudible][inaudible]
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