Q2 2024 UFP Industries Inc Earnings Call
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Speaker Change: Be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker, Mr. <expletive> Golf Yeh Vice President of Investor Relations. Please go ahead Sir.
Speaker Change: Welcome to the second quarter 2024 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.
Speaker Change: This conference call is available simultaneously in its entirety to all interested investors and news media through a webcast at USPI Dot com.
Speaker Change: A replay will also be available at that website.
Speaker Change: Before I turn the call over to Matt Mossad, 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.
Matt Mossad: 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 massage.
Matt: Thank you <expletive> and good morning, everyone.
Matt: We appreciate you taking the time to listen to our second quarter results and to hear what our plans are for the balance of the year and beyond.
Matt: The second quarter was generally in line with expectations and our team was able to roll with the changes in the economy and in the demand I'd like to thank them for their excellent work.
Speaker Change: If the last couple of months or any indication, we will need to follow buoys advice to turn and face the strange changes.
Speaker Change: Factors, such as a stranger than fiction election season.
Speaker Change: Fed, which like an adrenaline fueled Olympian may have over rotated on the landing with the higher for longer interest rates.
Matt: And then eye popping federal debt will cause further economic concerns.
Matt: The balance of 2024 is likely to be more challenged than originally forecast.
Speaker Change: We are seeing declines in unit volume in most business units.
Speaker Change: Flat demand creates competitive pressures as supply outstripped demand.
Speaker Change: Any reduction in interest rates during the balance of 2024 is unlikely to spur enough growth to provide a material impact in 2024, but could a 2025 and beyond.
Speaker Change: Our near term focus is on maximizing capacity utilization through strategic facility rationally rationalization weeding out underperforming, reducing SG&A costs in the non strategic and non critical areas to keep them in line with gross profit targets.
Speaker Change: And to simplify our operating structure even further.
Speaker Change: Because automation in plants specialization have made us more productive it enables us to further consolidate locations.
Speaker Change: Delivering exceptional customer service is a key driver for many of our locations as is avoiding additional freight costs from being further from our customers.
Speaker Change: However, as we have expanded our transportation capabilities and improved our manufacturing efficiencies, we have more opportunities to consolidate manufacturing offset cost increases and still provide excellent customer service.
Speaker Change: While reducing operating and overhead costs as a strong focus we know that to enhance future growth. We must continue to create more value through innovation, new products and automation as well as deploying our capital wisely.
Matt: In spite of short term challenges, we remain confident in our long term strategy.
Matt: We have ample capital to deploy and believe we are uniquely positioned to invest further to further accelerate our long term growth.
Matt: We have analyzed our runways as we do each quarter.
Matt: Given the current M&A environment growth by acquisition remains overpriced for our return model in many areas.
Matt: Those runways, where the best growth potential for organic and Greenfield type growth will receive more capital to execute their plans in lieu of acquisitions.
Matt: In terms of capital allocation over the next 24 months, we expect to allocate the following capital amounts.
Matt: One $300 million in packaging for a product specific vertical integration alternative packaging materials, including steel corrugate labels and geographic expansion and protective packaging expansion.
Matt: Two an additional $250 million in the decorators brand for marketing new product launches and increased capacity.
Matt: We believe that the <unk> technology is the best in the business and with proven features and benefits and the ability to achieve further scale and synergies in manufacturing. It is the right time to more significantly invest in this value added growth vehicle.
Matt: Number three $350 million in construction primarily to support housing.
Matt: <unk> include facilities in new geographic markets.
Matt: For automation to reduce manufacturing costs, and new product development and launches for several product lines, including OEM and aftermarket products through our recreate brand.
Matt: Number four $100 million investment in <unk> for wood protection chemicals, and equipment upgrades to consolidate locations and to enhance our product offerings and create patent protected technologies.
Matt: The above amounts are in addition to normal maintenance and replacement capital expenditures.
Matt: A quick overview of segment performance and outlook is as follows.
Matt: Retail solutions.
Matt: In the second quarter Pro Road unit sales were up 6% overall in line with the overall market contraction.
Matt: The team is adding new specialty products and fencing and outdoor spaces, while enhancing the <unk> brand.
Matt: Decorators unit sales were down 2% overall, while its decking and railing product unit sales were up 5%.
Matt: We expect to see a significant shift in customer concentration in 2025 with the overall impact being positive growth with both our sure stone and WPC products.
Matt: As already mentioned, we will be accelerating our investment in capacity, new products marketing and distribution with decorators to meet the expected increase in demand.
Matt: Our product strategy is to grow applications on the exterior of the home and in the yard.
Matt: While also adding new applications inside the home.
Matt: While increased marketing of new products expenses may drag on earnings near term, we are very confident that they will drive more shareholder value more quickly than our previous level of spend.
Matt: The outlook for retail based on the repair and remodel statistics is expected to be down mid single digits for the balance of 2024.
Matt: Longer term the age of the housing stock indicates the need for an increased level of repair and remodel spending.
Speaker Change: And construction site built business unit has been solid in a down market unit sales were up 4% in the quarter.
Matt: Factory built has performed well as unit sales are up 19%.
Matt: The outlook for site built will be down single digits for the balance of the year. While factory built is expected to continue to outperform prior year for the balance of 2024.
Matt: U S packaging.
Matt: Structural packaging continues to face soft demand and competitive pressures.
Matt: The sales organization is driving new customer acquisition, which we expect will become evident in 2025.
Matt: Given the demand environment and the impact of automation on increasing capacity without increasing footprint. The structural packaging team is aggressively pursuing strategic facility consolidation and cost rationalization, which we are confident can be achieved while maintaining excellent customer service.
Speaker Change: Pallet, one has performed well with unit sales up 10%.
Matt: The previous overhang of excess pallets has largely worked its way through the system and demand is more in line with historical norms.
Matt: With the current demand environment, and our growing investment in technology innovation marketing and analytics.
Speaker Change: The corporate Department team is executing its plans to focus on high priority projects, and reducing or deferring cost in projects, which have a less significant impact.
Speaker Change: The efforts to drive savings is made more difficult due to increased regulatory and risk costs, such as cyber security audit, new SEC reporting and other compliance requirements, which have increased our cost an estimated $10 million since 2020.
Speaker Change: Other than the strategic growth areas, we intend to make sure our SG&A cost get in line with historical targets.
Speaker Change: Some other areas of interest are one new products.
Speaker Change: New product sales for the second quarter were $133 6 million and year to date were $259 5 million.
Speaker Change: We are on track for our annual 2024 target of $510 million.
Matt: As you know new product development is an integral part of each business units strategic plan and we continue to drive that faster.
Matt: Number two.
Matt: Materials.
Matt: The lumber market declined during the quarter and is expected to remain well below normal levels as supply exceeds demand.
Matt: With new production coming online this year, we expect curtailments to occur in older less efficient facilities.
Matt: Number three.
Matt: Human capital.
Speaker Change: The U six unemployment index was up to seven 7% at the end of June versus six 9% at the end of April.
Speaker Change: Continuing our year long trend the majority of new jobs or in government health care, social services and nonprofits.
Matt: These jobs do not generally boost GDP.
Matt: Inflation has made it more difficult for many to make ends meet and the increased tax burdens further reduced purchasing power.
Speaker Change: This has enabled the creation of an availability of labor, which has improved since last year and we are still seeking the best hardworking talent, we can find.
Matt: And before M&A activity has picked up and more companies are accepting the fact that pandemic generated returns from excess deficit spending or not realistic gauges of future performance.
of each business unit's strategic plan, and we continue to drive that faster.
Matt: The multiple expectations are still artificially high in many cases, although there appears to be some softening as buyers and sellers acknowledged the lower demand environment.
Matt: Now I'd like to turn it over to Mike Cole to review the financial information.
Mike Cole: Thank you Matt.
Mike Cole: Our consolidated results. This quarter include a 7% drop in sales to $1 9 billion largely driven by a 6% reduction in selling prices while unit sales declined by 1%.
Mike Cole: The decline in selling prices resulted from a drop in lumber and more competitive pricing in most business units.
Mike Cole: Our overall unit sales held up well this quarter in spite of a more challenging demand environment due to the strength of our balanced business model.
Mike Cole: While adjusted EBITDA dropped 13% to $204 million. We're pleased to report our adjusted EBITDA margin remained well above historical levels at 10, 7%.
Mike Cole: I was also pleased to see our cash cycle improved to 56 days. This year from 63 days last year, reducing our investment in net working capital throughout the quarter.
Mike Cole: Our trailing 12 month return on invested capital also remains at historically high levels at nearly 20% almost two times, our weighted average cost of capital.
Mike Cole: We continue to increase our dividends and more aggressively completed share repurchases at favorable prices.
Mike Cole: And our balance sheet continues to gain strength with a cash surplus that has grown to over $1 billion. This year, providing us with flexibility to pursue our financial and strategic objectives.
Speaker Change: Moving on to our segments sales in our retail segment dropped 14% to $809 million consisting of a 7% decline in selling prices and a 2% decline due to transfers of certain product sales to other segments and a 5% decline in unit sales.
Matt: The unit decline was comprised of a 5% drop in volume with big box customers, while our volume with independent retailers was flat.
Matt: By business unit, we experienced a 6% decline in pro with a 4% decline in edge and a 2% decline in our decorators business unit.
Matt: We were pleased with our overall sales with decorators decking, which increased 15% and continues to experience solid demand.
Matt: In spite of lower overall demand in sales volumes as well as falling lumber prices. We're pleased to report a $4 million increase in retail gross profits for the quarter driven by a variety of factors.
Matt: Including better inventory management, SKU rationalization and operating improvements in each of our business units.
Matt: Operating profits were flat for the quarter due to a $4 million increase in SG&A expenses.
Matt: Moving on to packaging sales in this segment dropped 11% to 435 million consisting of an 8% decline in selling prices.
Matt: And a 6% decrease in units, partially offset by a 3% increase as a result of the transfer of certain product sales from retail.
Matt: Customer demand in this segment continues to be soft and that's contributed to more competitive pricing as.
Matt: As a result of these factors gross profit dropped by $35 million year over year for the quarter.
Matt: The year over year decline in gross profit was partially offset by an $8 million decrease in SG&A, resulting from a drop in incentive compensation.
Matt: Consequently, operating profits in the packaging segment declined by 27 million to $30 million.
Matt: Turning to construction sales in this segment increased 4% to $575 million as a 4% decline in selling prices was offset by a 7% gain in units and a 1% increase as a result of the transfer of certain product sales from retail.
Matt: Improvement in volume was due to our factory built unit, which increased 20%.
Matt: Primarily due to an increase in industry production and our site built unit, which increased 4% primarily due to market share gains in existing and new products.
Matt: These volume increases were offset by a decline in our concrete forming unit while volume in our commercial unit was flat.
Matt: The decline in selling prices was primarily experienced in our site building concrete forming business units.
Matt: Along with the unit declines I mentioned resulted in a $12 million reduction in our overall gross profit for the quarter.
Matt: When combined with a $2 million decrease in our SG&A due to lower incentive compensation, our operating profits declined by 10 million to $52 million for the quarter.
Matt: As we manage through this cycle. Each segment continues to focus on executing our strategies to grow our portfolio of value added products.
Matt: Our year to date ratio of value added sales to total sales improved slightly to 68%. This year from 67% last year and our ratio of new product sales to total sales dropped slightly to seven 3%. This year from seven 4% last year as we've made our criteria for qualifying more stringent including <unk>.
Matt: Minimum margin threshold.
Matt: We're also mindful of our cost structure in this environment as we ensure the company is appropriately sized relative to demand while still investing in the resources needed to achieve our long term objectives for growth product innovation, improving our efficiencies and building our brands.
Matt: Our SG&A expenses were in line with plan for the quarter and were $3 million lower than last year, driven primarily by lower bonus and sales incentives offset by higher base wages and benefit costs.
Matt: Given the more conservative outlook, we have for demand, we will step up our efforts to selectively reduce costs.
Matt: Moving on to our cash flow statement, our cash flow from operations was $239 million compared to $321 million last year due to an $18 million decline in our net earnings and noncash expenses and an increased investment in our working net working capital since year end, which was $64 million higher this.
Matt: Year than last year.
Matt: And the first six months of 2023, we were able to reduce our inventory substantially as we adjusted from the peak demand in the pandemic.
Matt: We believe our cash cycle is the best measure of our working capital management and we're pleased that it declined to 56 days. This year from 63 days last year due to a two day improvement in our receivables cycle as our receivables remain a healthy 94% current and a five day improvement in our days supply of inventory.
Matt: Driven by our construction and packaging segments.
Matt: Our investing activities included $107 million in capital expenditures, which includes $68 million of maintenance capex and $39 million of expansionary Capex.
Matt: As a reminder, our expansionary investments are primarily focused on three areas expanding our capacity to manufacture new and value added products Jia.
Matt: Geographic expansion in core higher margin businesses and achieving efficiencies through automation.
Matt: Finally, our financing activities included returning capital to shareholders through almost $41 million of dividends and $137 million of share repurchases. This year.
Matt: Through the end of last week, we accumulated a total of $186 million and repurchases under the 200 million authorization limit that expires at the end of this month.
Matt: Turning to our capital structure and resources, we continue to have a strong balance sheet with over $1 billion in surplus cash compared to $702 million last year.
Matt: And our total liquidity was $2 3 billion, which includes cash and availability under long term lending agreements.
Matt: With respect to capital allocation, we plan to continue to pursue a balanced and return driven approach as we've discussed in the past our highest priority for capital allocation.
Matt: Is to drive organic and inorganic growth that results in higher margins and returns.
Matt: Our strategy also includes continuing to grow our dividends in line with our anticipated free cash flow growth and repurchase our stock to offset dilution from share based compensation plans.
Matt: We'll continue to Opportunistically buy back stock.
Matt: When it's trading at a discounted value.
Matt: With these points in mind, our board approved a quarterly dividend of 33, a share to be paid in June representing a 10% increase from the rate paid a year ago.
Matt: Our board also approved another $200 million share repurchase authorization that expires at the end of July 2025.
Matt: With regard to Capex earlier this year, we indicated we plan to meaningfully increase our total capital expenditures to an estimated range of $250 million to $300 million in 2024 to capitalize on the automation and higher margin growth opportunities, we see in each of our segments.
Matt: So far this year, we've already approved $200 million of projects with another $100 million of requests in the pipeline for evaluation.
Matt: The timing of our investments may vary however, as a result of lead times for equipment as well as the time needed for site selection in the case of investments in new locations.
Matt: Finally, we continue to pursue a pipeline of M&A opportunities that are in a strong strategic fit while providing higher margin return and growth potential.
Matt: Recently, we've seen more activity in the pipeline, which is encouraging.
Matt: As a reminder, our first priority is to grow through M&A, but if the opportunities are present or evaluations arent appropriate we will pivot to greenfield growth, which we have considered in our capex targets.
Matt: I'll finish up with comments about our outlook for the rest of the year.
Speaker Change: We believe the soft demand and competitive pricing. We are currently experiencing will continue for the balance of the year, which will make for more challenging unit sales and profit comparisons.
Speaker Change: Further we anticipate any reduction in interest rates will not have a significant impact on market demand until sometime in 2025.
Matt: For the balance of the year by segment, we anticipate demand in retail decreased mid single digits.
Matt: Packaging will decrease mid to high single digits.
Matt: And construction will increase low to mid single digits, reflecting the continued strength of the factory built unit.
Matt: Finally, we believe we will continue to gain market share in each of our segments that will help offset the impact of lower demand.
Matt: While we manage through more challenging conditions in the short term, we remain confident in our long term growth and margin potential and we'll continue to invest wisely to capitalize on these opportunities.
Matt: All I have in financials, Matt.
Matt Mossad: Thank you, Mike and just to clarify I think the.
Matt Mossad: Dividend that was recently approved as payable in September not in June So just wanted to clarify that.
Speaker Change: And now I'd like to open it up for any questions that you may have.
Speaker Change: Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question Press Star One again, one moment, while we compile the Q&A roster.
Speaker Change: Okay.
Speaker Change: And our first question will come from the line of Reuben Garner with benchmark. Your line is now open.
Reuben Garner: Thank you good morning, everybody.
Speaker Change: Rubin.
Speaker Change: There seems to be an increase.
Speaker Change: Maybe just.
Reuben Garner: Picking it up in the press release or your comments this morning, but on market share gains and I understand the story in decorators for sure I was wondering if you could kind of elaborate on some of the opportunities or.
Speaker Change: Thoughts you have in some of your other markets, whether it's construction or packaging.
Speaker Change: Sure. It's a good question I think from a construction standpoint again, we're trying to drive some new product.
Speaker Change: Innovation, you mentioned recreate brand for manufactured housing factory built.
Speaker Change: Opportunities appear to be much stronger again, we've reiterated this many times, but the affordability factory built housing as.
Speaker Change: Is it very positive.
Speaker Change: Outcome, we think and it is going to continue to drive more housing that direction.
Speaker Change: One of the reasons, we believe that housing.
Speaker Change: <unk> is struggling to meet the needs is because of the affordability factor.
Speaker Change: And we think factory build hasnt advantage there.
Speaker Change: So very optimistic.
Speaker Change: On the site built side again, the opportunities as Mike mentioned, our geographic expansion. There is markets that we're not in today that people are migrating to and we think those are going to be very strong going forward as well.
Mike Cole: On the packaging side.
Speaker Change: We're trying to rationalize not only our facilities, but also our customer base.
Speaker Change: There is many customers that were working to gain share with.
Speaker Change: Trying to win customers.
Speaker Change: That's where we're going to pursue the market share gains.
Speaker Change: There may be others that we can't you can't get low enough in price to make it.
Speaker Change: It works for both the customer and for ourselves so.
Speaker Change: That's where there is a balance.
Speaker Change: Within the packaging space and I think also on packaging is the protective packaging materials and the opportunities in alternative materials such as steel.
Speaker Change: We want to take a look at it and grow with they serve a different customer and provide some different opportunities for us as well.
Speaker Change: So that's a quick overview Rubin.
Speaker Change: Great and then.
Rubin: You mentioned competitive pricing pressures I think in the packaging business, what about in retail and in construction anything that you would call out call out in either of those end markets from a competitive pressures I know pricing was down year over year.
Speaker Change: Particularly in construction, but more on a sequential basis have you seen any kind of competitive pressures pickup in either of those end markets.
Speaker Change: Yes, I guess, what I would say there Reuben is dead.
Speaker Change: Within the Big box segment.
Speaker Change: Pricing are adjusted based on lumber market, So theres already rationalization on the price side.
Speaker Change: With respect to.
Speaker Change: Yes construction itself there is adjustment periods every 90 days or so so I think those largely get adjusted.
Speaker Change: Based on market trends and market changes.
Speaker Change: Not to say that there aren't some there, but I think they're much more manageable at this point.
Speaker Change: Got it thanks for the detail guys and good luck this year.
Jamie: Thanks, Jamie.
Speaker Change: 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.
Kurt Yinger: Great. Thank you and good morning, everyone.
Speaker Change: Good morning, Kurt.
Kurt Yinger: I wanted to start out with.
Speaker Change: Decorators and Matt you had made a comment in the prepared remarks around maybe some shift in customer composition and it kind of dovetails into what has been some discussions around some shelf space movement for 2025 following line reviews.
Speaker Change: I guess I'm just wondering are you expecting any changes in your retail positioning heading into next year and if so how should we think about kind of sizing that impact.
Speaker Change: Yes, it's a good question Kurt I think.
Speaker Change: Obviously product line reviews are a process and we go through those periodically we're in the midst of those now.
Speaker Change: What we believe is we're going to increase our overall volume.
Speaker Change: Going to comment on where or how at this point.
Speaker Change: But we're very optimistic.
Speaker Change: Domestic about the future and I think the other part.
Speaker Change: Excuse me for decorators.
Speaker Change: Is that we have a number of opportunities with new products that we just haven't had the capacity to go after.
Speaker Change: So it's really a two fold we think we're going to increase sales of current products, but we also see an opportunity for a lot of new products.
Speaker Change: And that's what we're excited about.
Speaker Change: Got it okay.
Speaker Change: And.
Speaker Change: I guess the earlier question kind of touched on competitive pricing activity in site built.
Speaker Change: Would you see that pressure is accelerating or pretty consistent at this stage in.
Speaker Change: If you just look at kind of the single family numbers, it's not robust, but it seems like a pretty healthy market. Overall in terms of starts levels is it the slack capacity from for multifamily freeing up is it new facilities expansions kind of across the industry, creating some supply mismatch.
Speaker Change: Would you say is kind of driving that overall pressure.
Speaker Change: Well I agree with your assessment I think single family is solid multifamily decline is probably creating some capacity.
Speaker Change: Availability.
Speaker Change: And I'm sure folks are trying to fill that capacity somehow.
Speaker Change: To the extent, there's pressure I think that's where it's coming from it at least at this point.
Speaker Change: Got it Okay and then just last one on the retail side I mean, it was another impressive gross margin quarter. Despite what I think would be some level of headwind from the.
Speaker Change: The trend in lumber prices Undertreated business, I guess could you just give us a little bit more color around some of the operational improvements that you've kind of referenced where that margin enhancements coming from.
Speaker Change: Yes.
Speaker Change: Good point.
Speaker Change: Say occurred as.
Speaker Change: We're realizing a lot of the changes that were made when we.
Speaker Change: From a geographic based to a market based.
Speaker Change: Seeing the retail team and the <unk> team in particular do a really good job.
Speaker Change: Driving in efficiencies in their operations.
Speaker Change: They are utilizing best practices, even better than they have in the past. So I think we're seeing a lot of operational efficiencies driving it in and I think there's more of that to come through equipment enhancements.
Speaker Change: And I think the market itself as I mentioned before I think.
Speaker Change: To the extent that we're selling through box.
Speaker Change: Prices are pretty much determined so.
Speaker Change: I think at this point, we're just trying to be as efficient as we can make sure we're keeping our SG&A costs in line and drive as much improvement as we can.
Speaker Change: Okay, adding on top of that for a minute as a reminder, the spartanburg in the sunbelt plants.
Speaker Change: We purchased a few years ago and squeezing out the operating improvements in those and those businesses was going to take time. So part of the part of the driver for the operating improvements is just continuing to enhance the operations of those facilities.
Speaker Change: Got it okay. Appreciate the color guys and good luck here in Q3.
Speaker Change: You.
Kurt Yinger: Thanks Kurt.
Speaker Change: Thank you one moment for our next question.
Keith: And that will come from the line of Keith <unk> with BMO your.
Speaker Change: Your line is now open.
Speaker Change: Thank you.
Keith: Good morning.
Keith: Can you talk with Mike.
Speaker Change: If I heard you right right at the start of your prepared remarks, you talked about kind of.
Mike Cole: Pretty meaningful investment if I add all of them up sounds like out of $1 billion can.
Speaker Change: Can you give us some sense of.
Speaker Change: What kind of timeline you are looking at.
Speaker Change: And what kind of return expectations you have on these investments.
Speaker Change: Yes, so I think Keith.
Keith: As we looked at where we want to grow each of our business units as <unk>.
Keith: Solid strategic runways, they want to pursue.
Keith: Our typical first preferences M&A type transactions, because they get us into the space quicker they bring more people with them and they bring quicker returns generally so.
Keith: Because of the pricing in that marketplace. We're just taking their plans and we're pivoting towards either organic or greenfield type opportunities.
Speaker Change: <unk>.
Speaker Change: For Us Thats.
Speaker Change: We called out 24 months, but maybe slightly longer than that maybe slightly quicker depending on how much we can deploy and where the opportunities are but.
Speaker Change: But the main focus is trying to do.
Speaker Change: So for our investors that we have a plan to deploy that capital to provide the returns that we historically have provided.
Speaker Change: As everyone knows it takes a little longer to get a greenfield or organic type operation up to our ROI. Then if you you acquire something at a reasonable price, but we think long term, it's going to continue to drive the value and will make us more profitable less goodwill and better results.
Speaker Change: Okay.
Speaker Change: Is it fair to say if this is so did I hear you right that this is over the next two years. So this is kind of spread over a longer timeframe Act.
Speaker Change: Yeah, like I said Keith yes.
Speaker Change: Yes.
Speaker Change: And I'll have Mike chime into it I think we set out five year targets.
Mike Cole: We want to be able to allocate areas over the next 24 months, where they should go.
Mike Cole: And we have a lot of request for capital, but we are going to prioritize and go through that process. So within the next 24 months.
Mike Cole: To the extent that we havent deployed it we will have to plan for where it is going to be deployed.
Speaker Change: Got it.
Speaker Change: There's always kind of a lag between the time, where you got your plan squared away and and when the spend actually occurs and so the way that I think about it as we laid out our five year targets for sales growth unit sales growth and EBITDA margin and returns and.
Speaker Change: In order for us to achieve those targets.
Speaker Change: This is the capital that will need to be deployed.
Speaker Change: I see okay understood that makes sense and then.
Speaker Change: Just focusing a little bit more on the packaging side.
Speaker Change: No.
Speaker Change: Understand that the markets are challenged right now but curious.
Speaker Change: As you think about the growth there and investments there.
Speaker Change: As you are well.
Speaker Change #103: Process changed at all in terms of through cycle.
Speaker Change: Or earnings and margins in the packaging business I know in the past you've talked about packaging as being a key area of growth G&A highlighted kind of more investments there.
Speaker Change: But margins are decent volumes in the last six quarters or so have come under lot of pressure. So how do you sort of balance.
Speaker Change: Investments versus what's going on in the market today.
Mike Cole: Yeah, what I would say Keaton and I'll ask Mike to add some color to this too but.
Mike Cole: We focus on the EBITDA margin in that space and we still believe that that can be a very strong EBITDA margin business.
Mike Cole: Right now getting demand and capacity in line is our priority I think once we get there that will improve.
Mike Cole: The market is going to be what it is right now I think it's just generally it's a little more challenged today, but we think long term it'll it'll revert back to more of a normal market conditions and there is still consolidation opportunities in that space.
Mike Cole: If demand remains lower for longer that will create.
Mike Cole: Consolidation opportunities as well.
Mike Cole: Mike any color you want to add to that.
Mike Cole: Yes, Keith I think I'd, just kind of maybe dive into the details on the margins and how they and how they've changed.
Mike Cole: One factor that I look at is cost variances, we employ standard costing here.
Mike Cole: And so what I can see unfavorable cost variances coming through all the different facilities.
Mike Cole: Within packaging and for the first six months it was $20 million annualized is a pretty big number and I think.
Mike Cole: Being able to take a step into.
Mike Cole: Capacity consolidations and trying to.
Mike Cole: Get our cost structure appropriate.
Mike Cole: Optimized for demand.
Mike Cole: A big there's a big margin lift there and then making these investments in the business that Matt talked about that prepare us for more growth.
Matt Mossad: And being able to leverage leverage volume increases overtime in the future.
Donegal: That's very helpful that is Donegal, well good luck.
Keith: Thanks, Keith Thanks Pete.
Speaker Change: Thank you one moment our next question.
Speaker Change: And that will come from the line of Stanley Elliott with Stifel. Your line is now open.
Speaker Change: Okay.
Speaker Change: Hey, good morning, everybody. Thank you all for the questions.
Stanley Elliott: Can you talk about the new products you guys are working on how are these margin stacking up versus the rest of the portfolio.
Speaker Change #117: The important thing kind of reaching the 12 and a half kind of longer term target on EBITDA.
Donegal: Yes, that's a good question and as Mike indicated in his remarks, we do have a higher target.
Donegal: Yes.
Speaker Change: Returns for new products and.
Speaker Change: All the new products are meeting those that higher target.
Speaker Change: So I think that's a plus and I think the ones. We're working on the whole idea is to provide more value add to the customer.
Speaker Change: Create more.
Donegal: More non price competitive advantage on the products we're working on.
Donegal: And to help drive that growth.
Donegal: <unk> improve and lift the EBITDA margins.
Donegal: All the ones that we've called out for new products, thus far.
Donegal: Are destined to meet that.
Donegal: Target.
Donegal: And on the capacity plans.
Speaker Change: $1 billion or so is the right way to think about it kind of $200 million or so of growth plus or minus $100 million or so of maintenance capex.
Donegal: And some of that.
Mike Cole: <unk> weather sites or are there facilities, that's going to be kind of the.
Mike Cole: Determining factor.
Mike Cole: I think we talked a little bit the numbers that I put out there are in addition to the normal maintenance replacement type capex.
Mike Cole: Obviously, we plan to generate significant cash flow each year two so.
Mike Cole: We will have ample capital to do even more of that than what we're outlining here but.
Speaker Change #110: That's the that's the distinction I would call to that one Stanley Mike anything to add there.
Mike Cole: No that's.
Mike Cole: That's exactly right.
Mike Cole: And then last from me call Us a big focus kind of in this environment up and down the portfolio.
Speaker Change: Any ballpark on kind of.
Speaker Change: What we should take on our cost out for this year or maybe.
Speaker Change: Managers on the SG&A piece, just trying to get a sense for kind of what sort of costs are being are going to be.
Mike Cole: Coming out over the next year year and a half.
Mike Cole: Yes.
Kurt Yinger: Start here Kurt.
Mike Cole: Start here Stanley and let.
Mike Cole: Mike kind of finish up but I think we talked about tie in SG&A into our historical percentage of gross profit kind of metrics or sales.
Mike Cole: And then also Mike just called out another.
Speaker Change: $20 million or so of.
Mike Cole: Opportunity I'll call it.
Mike Cole: The.
Speaker Change: Unfavorable variances. So I think those are two data points that I would say are important.
Mike Cole: Mike what else would you add there.
Mike Cole: Yes Stanley I don't have an overall target for you, but we will be looking back.
Mike Cole: Our SG&A relative to sales and unit volume SG&A relative to gross profits.
Speaker Change #119: And we wanted to be able to get back to the types of levels we saw.
Mike Cole: Pre pandemic and so that'll be our focus in <unk>.
Mike Cole: And I would expect to start seeing those improvements in 2025.
Speaker Change: Perfect guys. Thanks, so much and best of luck the rest of year.
Mike Cole: Thank you Stanley and Stanley.
Speaker Change: Thank you one moment our next question.
Speaker Change #113: And that will come from the line of Jay Mccanless with Wedbush. Your line is now open.
Jay Mccanless: Hey, good morning, guys. Thanks for taking my questions.
Jay Mccanless: The first one.
Jay Mccanless: This expansion and decorators, even though you guys are still seeing negative sales trends in retail is this more of a specific call that you think you have something and decorators thats going to be new and different to the market or is this a larger called the retail demand is going to start getting better from here.
Jay Mccanless: Yes, I guess, what I would say Jay as it's the former we believe we have something special with our decorators, where they're sure stone technology.
Speaker Change #107: The patented technology and no one else has it.
Speaker Change #107: And for US, we just we see a tremendous amount of opportunities.
Speaker Change #107: And we think it's just the right time to really invest in those opportunities and help it grow even faster than originally scheduled.
Jay Mccanless:
Speaker Change: That's not a broader statement that the retail market is going to miraculously.
Speaker Change: Do the hockey stick up into the right in the next six months, but long term, we still think it's going to be strong but we.
Speaker Change: We expect our decorators brand to outperform.
Speaker Change #105: Okay. That's great. Thank you.
Speaker Change: And then the second question I had when you talked in the prepared comments about expanding the <unk> instruction.
Speaker Change: I guess, where you're going with this and.
Speaker Change #116: Be in smaller markets or a larger geographic focus in parts of the country, maybe walk us through where you are planning on expanding.
Speaker Change #116: Sure. That's a good question, Jay and I guess, what I would say is.
Speaker Change #104: We've been much more regionalized with our site built through.
Speaker Change #101: And so it's been primarily the non urban northeast.
Speaker Change: Southeast mid Atlantic area text.
Mike Cole: Texas and Colorado.
Mike Cole: Youll recall, many years ago, we exited California and.
Speaker Change #102: Nevada, Arizona, the boom and bust type markets, we call them.
Mike Cole: And.
Mike Cole: One of the things we're looking at is the demographic trends where people are moving to its creating a lot of opportunities.
Mike Cole: And that's where we're looking to add is we're going to try to do a little Wayne Gretzky and go to where the where the puck is going to be not where it is right now.
Mike Cole: And so we see several markets that we're working on.
Mike Cole: They're getting an influx of residents.
Speaker Change #118: Okay great.
Mike Cole: And then the last question I had.
Speaker Change #106: Lumber unlike emad.
Speaker Change: Weird, but we haven't seen more talk of curtailments or plants, reducing activity I guess, how much longer do you think it takes till we start seeing some of that especially single family starts continue.
Speaker Change #100: I mean, good but not great type of market environment.
Speaker Change: Yes, I think it is.
Speaker Change: Kevin told me yesterday I think the.
Kevin: The curtailments are going to be a little slower too.
Speaker Change #120: Develop I think there's still capacity coming online, which is going to be new and modern and much more efficient.
Kevin: And so I would expect curtailments to happen in some of the older facilities.
Speaker Change: And I think right now.
Speaker Change #115: Everyone's kind of waiting to see who blinks first.
Speaker Change: But they will have to be curtailments unless demand picks up.
Speaker Change: Okay.
Speaker Change #111: Okay, Great. That's all I had thanks guys.
Speaker Change #112: Thanks, Thank you.
Matt <unk>: Thank you and speakers I'm showing no further questions in the queue. At this time I would now like to turn the call back over to Mr. Matt <unk> for any closing remarks.
Matt <unk>: Well I'd like to thank you again for spending the time with us today.
Speaker Change #109: The short term outlook is full of potential changes long term, we remain on offense and committed to do in the words of imagine Dragons.
Speaker Change #109: It takes to make our company more valuable.
Speaker Change #109: Thank you for your investment in Us and we will keep working to ensure great long term returns.
Matt <unk>: Have a great day.
Speaker Change #114: This concludes today's program. Thank you all for participating you may now disconnect.