Q3 2024 UFP Industries Inc Earnings Call
The New York Times
One.
Speaker Change: Good day and welcome to the Q3, 2024 USP Industries Inc. Ernest Conference Call and Webcast.
Speaker Change: At this time, all participants are an elicin 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised.
Speaker Change: To withdraw your question, press star one-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. Dick Gauthier, Vice President of Investor Relations. Please go ahead.
Dick Gauthier: Welcome to the third quarter 2020 Ford Conference call for UFP Industries.
Speaker Change: Posting the call today our CEO Matt Missad and CFO Mike Cole. Matt and Mike will offer prepared remarks and then the call will be open for questions.
Speaker Change: This conference call is available simultaneously in its entirety to all interested investors and news media throughout webcast at ufpid.com
Speaker Change: A replay will also be available at that website. Before I turn the call over to Matt Mascad, I'd love to remind you that today's press release and presentation include Forward Looking Statements as defined in the private security litigation reform act of 1995.
Speaker Change: The statements are subject to risks and uncertainties that could cause actual results to different material from the, materially from the company's expectations and projections.
Speaker Change: These risks and uncertainties include, but are not limited to, those factors identified in the press release and in the findings with the Securities and Exchange Commission. I will now turn the call over to Matt Masad.
Matt Masad: Thank you, Dick, and good morning everyone. I want to thank you for joining us on our third quarter, 2024 earnings call.
Matt Masad: You have seen the financial results and while they would be great by 2019 standards, they aren't today.
Speaker Change: Well the odds would say that one bad apple don't spoil the whole bunch. This quarter tasted like apple cider vinegar.
Speaker Change: We were disappointed with the results, but not with the efforts of our team or the outlook for our future.
Speaker Change: As we discussed at the beginning of the year, we expected interest rate drops in the first six months of 2024, followed by a rebound in the economy in the second half.
Speaker Change: We indicated in July of 24 that the second half would not be as good as we originally hoped, and any interest rate reductions in the last five months of the year would not impact our results in 2024.
Speaker Change: It now appears the Fed and the government started celebrating Halloween a little early, putting on a costume to mask the slowing economy by lowering the Fed funds rate in September, ramping up government hiring and overstating job creation for U.S. citizens.
Speaker Change: Unfortunately, the added holds true even on Halloween. You can put lipstick on a pig, but it is still a pig.
Speaker Change: Fortunately, unlike many elected officials, our team recognizes pork and is willing to do the unpopular work to get the job done right.
Speaker Change: We will do what it takes to overcome macroeconomic challenges and position U.S.P.I for a more prosperous future.
Speaker Change: Reasons Data Signal of Slawing Accountability and Many of our markets, likely through mid-2020-25.
Speaker Change: with a very consequential election looming and many consumers struggling with inflation fueled higher costs, it will take a course correction to turn the economy around.
Speaker Change: getting mortgage rates steadily below 6% with the helpful for housing, but long-term rates are likely to remain higher in the near term.
Speaker Change: With those factors in mind, we are taking a much more aggressive posture in three areas.
Speaker Change: First, we're completing and expanding the previously planned facility consolidations to leverage capacity utilization and reduce operating costs.
Speaker Change: Second, we're exploring strategic alternatives for our businesses, which although even that positive no longer fit our long-term strategy or ROI targets.
Speaker Change: and third, reducing our core SGNA and operating class, which are unrelated to our strategic growth initiatives.
Speaker Change: Fullly implementing these initiatives would bring us more than 70 million of cross-reductions on an annualized basis.
Speaker Change: These are difficult decisions which impact our team, but they are necessary to drive long-term value for our company.
Speaker Change: Artisiers to retain all of our valued customers.
Speaker Change: Keep all of our best teammates and ensure that U.S.P.I. is positioned for success as the economy recovers.
Speaker Change: When external factors create change, we need to adopt the mantra of philosopher Peter Brady and be able to change from who we are to who we want to be.
Speaker Change: For UFP, that means a more streamlined, nimble and focused company.
Speaker Change: While the short-term outlook is not rosy, we remain very optimistic about the future of our company.
Speaker Change: We have an exceptional strong ballad sheet, an excellent experience management team, and more than a dozen runways for significant growth.
Speaker Change: I've said it before. Our team has successfully overcome adversity, is closely aligned with shareholders and has a culture of built to not only survive, but to thrive in times like these.
Speaker Change: As we outlined last quarter, we have several strategic areas to deploy capital.
Speaker Change: In addition to Greenfield Grove, this economy may also open opportunities for better valued acquisitions and opportunities to add more new products to our portfolio.
Speaker Change: We will continue to return capital to shareholders, be a cash dividend and share repurchases.
Speaker Change: We're pleased to report that last week the Board declared a cash dividend of 33 cents per share payable on December 16 to shareholder's record December 2.
Speaker Change: The current near-term outlook may also create beneficial share-reporteous opportunities as well.
Speaker Change: We received authority from the board in July to repurchase $200 million worth of stock over the next year.
Speaker Change: is a meaningful discount to the company's value. We are prepared to be more aggressive in purchases.
Speaker Change: As with all uses of capital, we are guided by our principle of investing where we can make the highest return.
Speaker Change: Consistently making our company better by improving our ally, growing EBITDA margin, driving sales growth, and creating an environment where our hardworking teammates can be successful and grow with us, our key to our success.
Speaker Change: We also believe the combination of these factors will create the best shareholder value.
Speaker Change: A quick review of the segments as follows.
Speaker Change: Construction for the quarter construction overall was roughly in line with our expectation.
Speaker Change: Sight-built EAT, yet remained resilient. Multi-family has been softer and single-family has been holding steady.
Speaker Change: The most recent trend has single family flowing as well.
Speaker Change: We are confident in our ability to earn solid returns when housing starts or above 1.2 million per year. Based on recent estimates from 4 to after starts in 2025 are still expected to be at or above that level.
Speaker Change: We believe site-built housing could receive a boost if mortgage rates drop to the mid-5% range.
Speaker Change: Given the current fiscal environment, we don't see a clear path to that rate level until at least 2025.
Speaker Change: On the cross side, we will see facility consolidations where we have access capacity.
Speaker Change: However, we will continue to add capacity and new geographies which are experiencing population growth.
Speaker Change: Factory Belt continued its strong showing.
Speaker Change: Affordable Housing is crucial in today's challenge housing environment, in fact, rebuilt at the best option for inexpensive housing.
Speaker Change: and also, while it's not a material part of our business today, the RV Market remains challenged and is expected to continue being soft.
Speaker Change: The company is introducing new products, including the recently launched LightLid, which creates more natural light in carol, excuse me, carol trailers and RVs.
Speaker Change: Packaging continues to face the manhead wins.
Speaker Change: When demanded softer, we pursue opportunities for market share gains which may come at a short-term cost.
Speaker Change: We also need to protect customer relationships that are critical to our mutual, long-term success.
Speaker Change: Soft demand may also create a competitive landscape where some operators can't afford to compete, which could provide future acquisition opportunities.
Speaker Change: On the cost and efficiency side, the packaging group will see the most facility consolidation to leverage capacity utilization and enhance overall profitability.
Speaker Change: This will also promote lower operating costs, as well as driving SGNA cost reductions.
Speaker Change: At the same time, we are encouraged by customer acquisitions which will boost 2025 results for packaging.
Speaker Change: Finally, the retail segment was in line with expectations.
Speaker Change: Prowood Head Unit declines in line with expectations they'd aligned with the retail channel in general.
Speaker Change: Pro would continue to pursue cost reductions on its inputs, improve operating efficiencies, and reduce SGNA costs.
Speaker Change: Prowood will also absorb the UFB Edge product line to create cost synergies and increase utilization of its distribution capabilities direct to retail outlets.
Speaker Change: For Decorators, we remain enthusiastic for the shirts known decking and railing product lines, and believe that while we will see shell spacious among our big box retail customers
Speaker Change: We believe consumers will win by being able to purchase our products at both independent and big-box retailers. By early in Q125, we will launch a new decking product called Summit.
Speaker Change: which will feature the same basic, sure stone technology with fewer features and benefits, designed for a more affordable price point for DIY and small contractor applications.
Speaker Change: Our premium voyage decking products will still be stock through our independent retail channel and available by special order.
Speaker Change: We continue our development process on other products to using the Sure Stone technology, including trim, pattern, and fascia.
Speaker Change: We expect to solve product launch in mid 2025 when additional capacity is available.
Speaker Change: Decorators will also be launching an entry-level pre-assembled railing product in early 2025.
Speaker Change: Some other matters of interest include new products sales for the quarter of 118.7 million and year to date of 388.4 million. We are tracking close to our 2024 target of 510 million.
Speaker Change: New Product Development is an integral part of each business-unished strategic plan, and we will continue to increase our investment in this area.
Speaker Change: Our Innovate Venture Fund just closed its seven investment, seventh investment in companies which are late-stage development or early-stage commercialization.
Speaker Change: The companies have new products and innovative solutions which have potential to be utilized by one of our business units in the future.
Speaker Change: The labor market has improved substantially.
Speaker Change: The U6 season will lead a just at unemployment index for September, indicate 7.7% unemployment, which means more workers are without jobs.
Speaker Change: While a pool of applicants is larger, the cost of labor remains higher and inflation is making more difficult for families to make ends meet.
Speaker Change: We continue to be burdened by higher benefit costs for healthcare, driven in part by mandatory coverage requirements, and nonetheless a fairly expensive pharmaceuticals.
Speaker Change: In addition, some states run the risk of pricing themselves out of the labor markets, your new mandate is benefits and regulatory burdens.
Speaker Change: On the acquisition front, our acquisition pipeline is growing and we are seeing a bit more realism in valuations from some targets.
Speaker Change: In cases of new geographies and product extensions, when we can acquire a company in a desired runway which yields a better return, we prefer that to a green field startup.
Speaker Change: Now I'd like to ask Mike Cole to report on the financial results.
Mike Cole: Thank you, Matthew. Our consolidated results of this quarter included 10% decline in sales to 1.65 billion. Largely driven by a 7% reduction in selling prices while units sales decline by 3%.
Mike Cole: The decline in selling prices resulted from a decrease in lumber as well as weaker demand, a weaker demand environment which led to more competitive pricing in most business units.
Mike Cole: These had wins resulted in a 21% decline in our adjusted EBITDA, 265 million.
Mike Cole: Importantly, our adjusted EBITDA margin remains well above historical levels at 10%. Reflecting the benefits from our strategic decisions, we'll find our business around the market we serve, our improved portfolio mix, and overall strong execution of our operating teams.
Mike Cole: Our Tralling 12 Months return on a Vesta Capital also remains at historically high levels at nearly 20% Almost two times are weighted average cost to capital, highlighting the strong returns our businesses capable of generating in any market.
Mike Cole: and our balance sheet continues to gain strength with the cast surplus that's grown to almost 1.2 billion this year, providing us with ample flexibility to pursue our financial and strategic objectives.
Mike Cole: Moving on to our segments.
Mike Cole: Sales in our retail segment dropped 13% to 636 million consisting of a 7% decline in selling prices, a 2% decline due to transfers of certain products sales to other segments, and a 4% decline in units.
Mike Cole: The unit decline was comprised of a 3% drop in volume with big box customers while our volume was independent retailers decline by an 8%
Mike Cole: By Business Unit, we experience to 5%.
Mike Cole: Unit Decline and Prowood, a 4% decline in Edge, and a 3% decline in Decorators.
Mike Cole: We were pleased with our overall sales and decorators decking which increased 17% and continues to experience solid demand.
Mike Cole: Sales have sure stone decking increased 20% and represented nearly half of our composite decking sales.
Mike Cole: The performance of our sure stone product is especially encouraging given our efforts to expand our capacity and increase our marketing efforts.
Mike Cole: Our gross profits declined 11% while gross margins improved by 30 basis points.
Mike Cole: The U over year margin improvement resulted from favorable changes in mix in the sustained impact of operating improvements we've discussed throughout the year.
Mike Cole: He's positive for partially offset by lower unit sales and negative operating leverage to get a fixed cost of manufacturing as well as the impact of falling lumber prices on our variable price products primarily pro-ad treated lumber.
Mike Cole: Operating profits declined by almost five million as the decline in our gross profits was offset by a 7 million dollar decrease in SGA expenses, primarily due to lower incentive compensation costs.
Mike Cole: Moving on to packaging.
Mike Cole: Sales on this segment dropped 11% to 412 million consisting of an 8% decline in selling prices in a 5% decrease in units, personally offset by a 2% increase.
Mike Cole: as a result of the transfer of certain products sales from retail.
Mike Cole: Customer demand in this segment remains soft and that's contributed to more competitive pricing as we execute our strategy to gain market share. As a result of these factors, growth profits dropped by almost 23 million year over year for the quarter.
Mike Cole: The U over year declining gross profits was partially offset by a $3 million decrease in SGA resulting from a drop in its son of compensation.
Mike Cole: Constiquantly operating profits in the packaging segment defined by 20 million to a total of 22 million for the quarter.
Mike Cole: Turning to construction, sales in the segment decreased 8% to 535 million, as a 7% decline in selling prices and a 2% decline in units, was personally offset by 1% increase as a result of the transfer from retail.
Mike Cole: The decline in volume was due to our site built commercial and kind of forming this Missad student week or demand.
Mike Cole: These declines were partially offset by any 11% unit increase in our factory-built unit due to an increase in industry production.
Mike Cole: The decline in selling prices, first primarily experienced in our site built business unit, which along with unit, the clients I mentioned resulted in a $33 million reduction in our overall gross profits for the quarter.
Mike Cole: When combined with a $6 million decrease in our S.C. and A due to lower incentive compensation, our operating profits declined by $27 million to a total of $42 million for the quarter.
Mike Cole: As we manage through this cycle, each segment continues to focus on executing our long-term strategies to grow our portfolio of value added products.
Mike Cole: Our year-to-date ratio of value-added sales to total sales improves slightly to 69% this year from 68% last year.
Mike Cole: and our ratio of new products sales to total sales drops slightly to 7.2% this year from 7.6% last year. As we've made our criteria for qualifying more stringent, including a higher minimum margin threshold.
Mike Cole: We believe when the cycle returns to growth, we will be well-positioned with an improved portfolio of value at a product, supporting higher growth and profitability.
Speaker Change: Ross, a mindful of our cost structure in this environment as we work to.
Speaker Change: worked to find the right balance of making sure 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 efficiency through investments in technology and building our brands.
Speaker Change: Our SGA expenses were below plan and prior year for the quarter primarily due to lower bonus and sales incentive expenses.
Speaker Change: Given the more conservative outlook, we have for demand and pricing that extends well into 2025. We plan to be more aggressive in our efforts to selectively reduce costs and capacity.
Speaker Change: We've targeted an annual run rate of adjusted EBITDA improvements from cost and capacity reductions of 60 million.
Speaker Change: We're currently taking actions that were resolved in 35 million improvements in 2025.
Speaker Change: Moving on to our cast flow statement, our U-Data operating cast flow was nearly 500 million.
Speaker Change: Last year our operating cash flow of 711 million was elevated and included $178 million reduction in networking capital as we adjusted to reduce our inventories from the peak demand of the pandemic.
Speaker Change: Our investing activities included 165 million in capital expenditures comprising 108 million of maintenance capbacks and 57 million of expansionary capbacks.
Speaker Change: As a reminder, our expansionary investments are primarily focused on three key areas.
Speaker Change: Expanning your capacity to manufacture new and value-edited products.
Speaker Change: Geographic Expansion and Core Higher Margin Businesses, and Achieving Existiencies through Automation.
Speaker Change: Finally, our financing activities primarily consisted of returning capital to shareholders through almost 61 million of dividends and 159 million of share repurchases so far this year.
Speaker Change: This year we repurchased approximately 1.4 million shares at an average price of less than $114.
Speaker Change: and the CPCC, turning to our capital structure and resources. We continue to have a strong balance sheet with nearly 1.2 billion in surplus cash compared to 957 million each last year. And our total liquidity is 2.4 billion, which includes cash.
Speaker Change: I had availability under long term lending agreements.
Speaker Change: With respect to capital allocation, we plan to continue to pursue a balance of approach and return to our approach as we discussed in the past.
Speaker Change: Our highest priority for capital allocation is to drive organic and inner vanic growth that results in higher margins and returns.
Speaker Change: Our strategy also includes continuing to grow our dividends in line with our anticipated free cash flow growth and repurchase our stock to offset delusion from share-based compensation plans.
Speaker Change: We'll continue to opportunistically buybacks that more stock when we believe it's trading at a discounted value.
Speaker Change: With these points in mind, our board approved a quarterly dividend of 33 cents a share to be paid in December. Representing a 10% increase from the rate paid a year ago.
Speaker Change: Last year our board approved another last quarter, excuse me, our board approved another 200 million share repurchased authorization that expires at the end of July 2025.
Speaker Change: We have not accumulated any repurchases under this new authorization.
Speaker Change: with regard to Cap X. Earlier this year, we indicated we plan to meaningfully increase our total capital expenditures to our last made of range of 200 to...
Speaker Change: 250 million to 300 million and 2024.
Speaker Change: to capitalize on the automation and higher margin growth opportunities we see in each of our segments.
Speaker Change: So far this year we've already approved 295 million of projects with another 55 million of requests in the pipeline free valuation.
Speaker Change: The timing of our investments may vary, however, as a result of lead times for equipment, as well as the time needed for slight selection in the case of investments in new locations.
Speaker Change: Finally, we continue to pursue a pipeline of M&A opportunities that are a strong strategic fed while providing higher margin, return and growth potential.
Speaker Change: Recently we've seen more activity in the pipeline which is encouraging.
Speaker Change: and we will remain disciplined on valuation.
Speaker Change: As we mind, our first priority is to grow through M&A, but if the opportunities aren't present or valuations aren't appropriate, we'll pivot to greenfield growth, which we'd consider in our cap-ax targets.
Speaker Change: I'll finish up with comments about our outlook for the rest of the year. We believe the soft demand and competitive pricing were currently experiencing and 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 short-term rates will not have a significant impact on market demand and therefore pricing will.
Speaker Change: and therefore pricing until sometime well into 2025.
Speaker Change: For the balance of the year by segment, we anticipate year over year demand in retail will remain mid-singled to slower, packaging year over year demand will remain mid to high-singled to slower.
Speaker Change: and construction year over year demand will be down low single digits as strengthened our site bill unit, offset softer demand in other units.
Speaker Change: Finally, we believe we'll continue to gain markets here in each segment that will help offset the impact of lower demand and strengthen our competitive positioning wind demand improves.
Speaker Change: While we manage through more challenging conditions in the short term, we remain confident in our long-term growth and margin potential and will continue to invest wisely to capitalize on these opportunities.
Speaker Change: with that we'll open it up for questions.
Speaker Change: Thank you, as a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. So withdraw your question, please press star 11 again, one moment while we compile the Q&A roster.
Speaker Change: And our first question will come from the line of Ruben Garner with benchmark, your line is open.
Speaker Change: Thank you for your money.
Ruben Garner: Good morning.
Ruben Garner: Matt, you referenced 70 million in annualized cost reductions. I think there was three buckets to that. Can you help us break down and be how much are coming from each of those buckets and then I think.
Speaker Change: The Strategic Lock at a few places in the evening is something that's new and we want to see how much one is my field, I'm not going to turn on the call.
Speaker Change: Yes, I guess when I would say Rubin is, when you look at the facility consolidations, they would, they would.
Speaker Change: in capsulate probably all those different buckets of both operating costs and S.G. and expenses. So I don't really have a breakdown among the three different groups.
Speaker Change: and Mike may be able to give you a little more detail, but I think that's the way that I'm looking at them as they're all connected and that's why I have a headline number for you as opposed to individual numbers by each group for category.
Mike Cole: Yeah, Rubin and I referenced the 35 million that we're taking actions on today. About half of that is S.C.N.A. Reductions.
Mike Cole: and the other half is more capacity consolidation. The 60 target will be a public similar combination.
Speaker Change: Okay, great. And then...
Speaker Change: mentioned maybe having to get a little more aggressive to take share with the weakness in the packaging industry. Are there any other...
Speaker Change: Markets were things that picked up from a competitive and pricing standpoint outside of the...
Speaker Change: Kamaddy, whether it's you know, site built construction with multi-family.
Speaker Change: Holy Rowan over or...
Speaker Change: and anything else that jumps out that's specifically increased in competition of weight.
Speaker Change: Yeah, I think what you're seeing in site built in some other markets has demand, wings a little bit, they're obviously becomes more competitive pressure in this every year.
Speaker Change: A customer is looking to try to maximize the values that they're able to deliver. They consistently are looking for reductions wherever they can get them.
Speaker Change: that does create a more competitive atmosphere. And again, I referenced the Highline Housing Stars number of 1.2 million or better. If it drops below that, obviously that pressure gets more profound than if it stays above that level.
Speaker Change: Thanks for watching, good luck us.
Speaker Change: Thank you. Thanks, Freemann. Thank you. One moment bar next question.
Speaker Change: And that will come from the line of Keaton Mantoira with BMO Capital Market. Your line is open.
Speaker Change: Good morning and thank you for taking my questions. I'm going to have to start with Matthew.
Speaker Change: on the M&E pipeline.
Speaker Change: I think you've increased opportunity in any one of the segments or sort of your appetite for M&A is it great and one was to see other or is it just based on kind of what kind of opportunities presented and kind of the value there.
Speaker Change: Yeah, what we're trying to do, Ruben is staying within our strategic runways and make sure that we find the best values in each of those runways.
Speaker Change: We're not waiting at any more or less based on the runway, but as Mike pointed out, we're looking for the best value, and wherever those best values are, as well, we're really going to target.
Speaker Change: And as we said at the end of the last quarter we have capital allocation model for each of those runways and as Mike explained we'll pivot the back and forth either M&A or Greenfield with a preference being on M&A if the valuations are right.
Speaker Change: and the multi-year capital investment program that you have.
Speaker Change: is there any rethink around the cadence of those investments given the market backdrop currently or is this sort of an opportunity to really reduce costs and position for the action?
Speaker Change: I still expect the cadence to be what we've talked about that billion dollars I assume you're referring to from last quarter I'd expect that took her pretty evenly over the next four to five years
Speaker Change: Understood, and then you know.
Speaker Change: Within this one last time, within the construction segment, you know, you are taking down.
Speaker Change: in all kind of two four numbers and just you know, back half of 24.
Speaker Change: Can you talk about sort of where you saw sort of increased pressure, you know, through this year and, you know, kind of, are you seeing any signs of stabilization in any of the end markets there?
Speaker Change: Yeah, that's a complex question, Keaton. I would tell you that the multi-family side of the business.
Speaker Change: was softer earlier and I think that's rate sensitive when we're finding out single family is also a rate sensitive.
Speaker Change: I think right now there's just the uncertainty in the economy is probably making it more difficult to predict what's going on in the fourth quarter. I would expect that that will stabilize better in 25.
Speaker Change: Um, but...
Speaker Change: Law term mortgage rates are important. The consumer confidence is important and what we're listening to right now is our customers, we're they're looking at what they're
Speaker Change: and their backlogs are as well as what their cancellation rates are and how many unsold homes they currently have.
Speaker Change: Keaton, if I add maybe a little color by business unit, I want to say that on the site, we assume Missad's single digits down, which is about right.
Speaker Change: Factory Bill, we thought would be strong, which is about right. The difference is commercial and concrete forming, we thought would perform a little better.
Speaker Change: and that took us from low single digits up last quarter to an expectation of low single digits down.
Speaker Change: and C.4. And that's not unusual for commercial projects to push, unfortunately, and that seems to be what's occurred in the concrete forming business unit is a bit more interest rate sensitive.
Speaker Change: I think commercial and concrete form are other reasons for the modest change in the outlook.
Speaker Change: Gordon, that's very helpful, color, I'll turn it over. Thank you. Thank you. One moment for our next question.
Speaker Change: And that will come from the line of Kurt Yinger with the A-Davits in your line of open.
Speaker Change: Great thanks for the morning everyone.
Kurt Yinger: Matt at the outset you had talked or alluded to at least kind of strategic alternatives for some of the business units understanding you might not want to talk to specifics.
Kurt Yinger: Could you talk about strategic kind of criteria that would...
Kurt Yinger: You know, no longer make a business unit kind of fit into the portfolio that you want to have. And maybe as you look forward a couple years, like what do you envision being a positive outcome related to this process?
Speaker Change: That's a really good question, Kurt. What I would say is the criteria are pretty basic. We've always had the...
Speaker Change: The mindset of looking at an operation that's underperforming and either getting it to perform as an acceptable level or closing it.
Speaker Change: Those are relatively easy straight forward decisions.
Speaker Change: One of the things that we've done in the past is we've made opportunistic purchases of businesses that we thought or expected to have synergies with the rest of our business model. As time progresses, sometimes that proves out to be true, other times it proves out to not be true.
Speaker Change: So we may have businesses that are operating profitably that are not aligned with the long-term strategic goals and we don't have synergy relationships.
Speaker Change: with the existing business units or runways. Those would be the ones that I would expect that we would evaluate here very quickly and make determinations on which strategic alternatives took her suit.
Speaker Change: and it's a bit nebulous, but I think that's really the criteria that we're looking at.
Speaker Change: and I just be clear like would selling some of those business units be within kind of the realm of those options.
Speaker Change: Yes, I think that would also be on the table.
Speaker Change: Okay.
Speaker Change: and then historically you've shown and talked to you were not being a meaningful factor to earnings, even though obviously it is impactful on the sales line. It is very anything that's changed.
Speaker Change: versus the model historically where, you know, if we were to expect a stronger lumber pricing environment next year, you could leverage that on the earnings line or is it generally the same message that we've heard in the past.
Speaker Change: So I think it...
Speaker Change: Generally the same message that you've heard in the past with the exception being that there may be some efficiencies that we would gain in that.
Speaker Change: Environment, and without getting too deep into the various, you know, we believe as the internal hedge we have on lumber market pricing. I do think...
Speaker Change: We are able to better take advantage of certain efficiencies in a higher lumber market than where it is today.
Speaker Change: Okay, okay.
Speaker Change: That makes sense. And then just last one, sticking on the lumber talk deck, benchmark prices right now would maybe suggest that it could be higher year or year and queue for.
Speaker Change: You know, you're still talking about a lot of competitive pricing pressures and certain business units. Is there at least a short-term risk in your mind that...
Speaker Change: You know, if we were to see lumber get some momentum here over the next one to two quarters that that could, you know, prove a more challenging dynamic on the gross margin line or would you expect that you could still pass that inflation for real.
Speaker Change: Yeah, I guess the simple answer to that one is on our variable price products, I think that actually would help us not hurt us.
Speaker Change: Son of the fixed price products have made work in the opposite direction, but given the current demand environment, I think it's on balance of being that positive.
Speaker Change: Okay, appreciate the color. Yeah, just to add on to that maybe the Curtis is in it.
Speaker Change: for on the fixed price product side so if you get into the packaging environment, if if lumber prices move up and prices are fixed, smaller competitors are going to have a hard time and an environment like that too.
Speaker Change: Alright, okay, thanks for that mic.
Speaker Change: Thank you, one moment for our next question.
Speaker Change: And that will come from the line of Stephen Giam with Sadoti, your line is open.
Stephen Giam: Good morning gentlemen. My first break in here.
Stephen Giam: On the topic of margins, if the market we can further watch strategies which you guys consider to manage margins effectively. Could you like ramp up any existing margin improvement initiatives?
Speaker Change: I think we're constantly looking Steven at ways to improve our margin. We talked about reducing our operating class, doing facility consolidations to take advantage of capacity utilization.
Speaker Change: and trying to reduce or eliminate certain SGNA clause.
Speaker Change: I don't know that there's any other magic items that we can reach to to create further reductions other than what we're already targeting.
Speaker Change: Thank you. I guess you can also, can you show your perspective on the performance of your products? I think you have, you said, like, you have some new products coming through on in 25. How did this light position you for growth in 25 even if the macro-consistence remains somewhat volatile?
Speaker Change: Yeah, I think Mike pointed out some of the criteria for new products, new products to us, have to meet certain criteria from a return and a margin standpoint.
Speaker Change: So, at a basic minimum that there are new products that what I would call our core line innovations, which are replacing and resisting product line with a better quality product. We would expect someone to have some even if the demand was the same.
Speaker Change: for totally new products, new to the market type products.
Speaker Change: Those have an opportunity to still be absorbed into the marketplace, the gain sales, and to gain market share. And our goal there would be whatever market share we pick up will come at a better margin profile.
Speaker Change: So those two things would be that the keys that I would look at to say the new product initiative is working.
Speaker Change: I think what I'd also add is that the R&D effort in the new product development effort within the company.
Speaker Change: has really been ramped up and I'm excited about what they've been able to accomplish. And the cadence for new product introductions is also stepped up. So as we discussed a few years back, we wanted to get faster at that. And I think they're making really good progress on that initiative.
Speaker Change: Thank you so much guys.
Speaker Change: Thank you.
Speaker Change: Thank you. I'm showing know for the questions in the queue at this time. I would like to turn the call back over to Mr. Matt Missad for any closing remarks.
Matt Missad: Well, I'd like to thank you again for spending time with us today. While the short-term outlook is challenging, long-term, we remain on offense and optimistic.
Matt Missad: Hopefully we can be like the Lions last Sunday and put big numbers up on the scoreboard.
Matt Missad: It would also help our ability to excel if the referees selected next week, protect free enterprise and preserve the constitutional requirement of personal freedom, coupled with personal responsibility.
Matt Missad: But that is wishful thinking.
Matt Missad: We're Carlos of the outcome, our team will channel some pop culture icons like Brittany, Brianna and the Pesh mode and we're hard to get what we want. Thank you for your investment in us and we'll keep working to ensure great long-term returns. Have a great day.
Speaker Change: This concludes today's program. Thank you all for participating. You may now disconnect.
Speaker Change: [inaudible]
Speaker Change: The End
Speaker Change: The Matthew Missad, Dick Gauthier, Dick Gauthier
Speaker Change: Music
Speaker Change: Music Music
Speaker Change: Good day and welcome to the Q3 2024 USP Industries Inc. Ernest Conference Colin Webcast.
Speaker Change: At this time, all participants are an elicinolimone. 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised.
Speaker Change: To withdraw your question, press star one-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. Dick Gauthier, Vice President of Investor Relations. Please go ahead.
Speaker Change: Welcome to the third quarter 2024 conference call for UFP Industries. Hosting the call today are CEO Matt Missad and CFO Mike Cole. Matt and Mike will offer prepared remarks and then the call will be open for questions.
Dick Gauthier: This conference call is available simultaneously in its entirety to all interested investors and news media through our webcast at ufpi.com.
Dick Gauthier: A replay will also be available at that website. Before I turn the call over to Matt Missad, 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 1995.
Dick Gauthier: These statements are subject to risks and uncertainties that could cause actual results to differ materially from the company's expectations and projections.
Dick Gauthier: These risks and uncertainties include, but are not limited to, those factors identified in the press release and in the filings with the Securities and Exchange Commission. I will now turn the call over to Matt Missad.
Matt Missad: Thank you, Dick, and good morning, everyone. I want to thank you for joining us on our third quarter 2024 earnings call.
Matt Missad: You have seen the financial results, and while they would be great by 2019 standards, they aren't today.
Matt Missad: While the oddsmen say that one bad apple don't spoil the whole bunch, this quarter tasted like apple cider vinegar.
Matt Missad: We were disappointed with the results, but not with the efforts of our team or the outlook for our future.
Matt Missad: As we discussed at the beginning of the year, we expected interest rate drops in the first six months of 2024, followed by a rebound in the economy in the second half.
Matt Missad: We indicated in July of 24 that the second half would not be as good as we originally hoped, and any interest rate reductions in the last five months of the year would not impact our results in 2024.
Matt Missad: It now appears the Fed and the government started celebrating Halloween a little early, putting on a costume to mask the slowing economy by lowering the Fed funds rate in September, ramping up government hiring, and overstating job creation for U.S. citizens.
Matt Missad: Unfortunately, the adage holds true even on Halloween. You can put lipstick on a pig, but it is still a pig.
Matt Missad: Fortunately, unlike many elected officials, our team recognizes Pork and is willing to do the unpopular work to get the job done right.
Matt Missad: We will do what it takes to overcome macroeconomic challenges and position USPI for a more prosperous future.
Matt Missad: Recent data signal a slowing economy in many of our markets, likely through mid-2025.
Matt Missad: With a very consequential election looming and many consumers struggling with inflation-fueled higher costs, it will take a course correction to turn the economy around.
Matt Missad: Getting mortgage rates steadily below 6% would be helpful for housing, but long-term rates are likely to remain higher in the near term.
Matt Missad: With those factors in mind we are taking a much more aggressive posture in three areas.
Matt Missad: First, we're completing and expanding the previously planned facility consolidations to leverage capacity utilization and reduce operating costs.
Matt Missad: Second, we're exploring strategic alternatives for our businesses, which although EBITDA positive, no longer fit our long-term strategy or our ROI targets.
Matt Missad: And third, reducing our core SG&A and operating costs, which are unrelated to our strategic growth initiatives.
Matt Missad: Fully implementing these initiatives would bring us more than $70 million of cost reductions on an annualized basis.
Matt Missad: These are difficult decisions which impact our team, but they are necessary to drive long-term value for our company.
Matt Missad: Our desire is to retain all of our valued customers.
Matt Missad: Keep all of our best teammates and ensure that UFPI is positioned for success as the economy recovers.
Matt Missad: When external factors create change, we need to adopt the mantra of philosopher Peter Brady and be able to change from who we are to who we want to be. For UFP, that means a more streamlined, nimble, and focused company.
Matt Missad: While the short-term outlook is not rosy, we remain very optimistic about the future of our company.
Matt Missad: We have an exceptionally strong balance sheet, an excellent, experienced management team, and more than a dozen runways for significant growth.
Matt Missad: I've said it before, our team has successfully overcome adversity, is closely aligned with shareholders and has a culture built to not only survive but to thrive in times like these.
Matt Missad: As we outlined last quarter, we have several strategic areas to deploy capital.
Matt Missad: In addition to greenfield growth, this economy may also open opportunities for better-valued acquisitions and opportunities to add more new products to our portfolio.
Matt Missad: We will continue to return capital to shareholders via cash dividends and share repurchases.
Matt Missad: We are pleased to report that last week the board declared a cash dividend of 33 cents per share payable on December 16 to shareholders of record December 2.
Matt Missad: The current near-term outlook may also create beneficial share repurchase opportunities as well.
Matt Missad: We received authority from the board in July to repurchase $200 million worth of stock over the next year.
Matt Missad: If there are opportunities to obtain shares of what we believe is a meaningful discount to the company's value, we are prepared to be more aggressive in repurchases.
Matt Missad: As with all uses of capital, we are guided by our principle of investing where we can make the highest return.
Matt Missad: Consistently making our company better by improving ROI, growing EBITDA margin, driving sales growth, and creating an environment where our hard-working teammates can be successful and grow with us are keys to our success.
Matt Missad: We also believe the combination of these factors will create the best shareholder value.
Matt Missad: A quick review of the segments is as follows.
Speaker Change: Construction. For the quarter, construction overall was roughly in line with our expectations.
Speaker Change: Site built, eased, yet remained resilient. Multi-family has been softer and single family has been holding steady.
Speaker Change: The most recent trend has single families flowing as well.
Speaker Change: We are confident in our ability to earn solid returns when housing starts are above $1.2 million per year. Based on recent estimates from forecasters, starts in 2025 are still expected to be at or above that level.
Speaker Change: We believe site-built housing could receive a boost if mortgage rates drop to the mid-5% range.
Speaker Change: Given the current fiscal environment, we don't see a clear path to that rate level until at least 2025.
Speaker Change: On the cost side, we will see facility consolidations where we have excess capacity.
Speaker Change: However, we will continue to add capacity in new geographies which are experiencing population growth.
Speaker Change: Factory built continued its strong showing.
Speaker Change: Affordable housing is crucial in today's challenged housing environment and factory built is the best option for inexpensive housing.
Speaker Change: and also while it's not a material part of our business today, the RV market remains challenged and is expected to continue being soft.
Speaker Change: The company is introducing new products including the recently launched light lid which creates more natural light in cargo trailers and RVs.
Speaker Change: Packaging continues to face demand headwinds.
Speaker Change: When demand is softer, we pursue opportunities for market share gains, which may come at a short-term cost.
Speaker Change: We also need to protect customer relationships that are critical to our mutual long-term success.
Speaker Change: Soft demand may also create a competitive landscape where some operators can't afford to compete which could provide future acquisition opportunities.
Speaker Change: On the cost and efficiency side, the packaging group will see the most facility consolidations to leverage capacity utilization and enhance overall profitability.
Speaker Change: This will also promote lower operating costs as well as driving SG&A cost reductions.
Speaker Change: At the same time, we are encouraged by customer acquisitions, which will boost 2025 results for packaging.
Speaker Change: Finally, the retail segment was in line with expectations.
Speaker Change: Crowood had unit declines in line with expectations and in line with the retail channel in general.
Speaker Change: ProWood continues to pursue cost reductions on its inputs, improve operating efficiencies, and reduce SG&A costs.
Speaker Change: ProWood will also absorb the UFP Edge product line to create cost synergies and increase utilization of its distribution capabilities direct to retail outlets.
Speaker Change: For decorators, we remain enthusiastic for the SureStone decking and railing product lines and believe that while we will see shelf space shifts among our big box retail customers, we believe consumers will win by being able to purchase our products at both independent and big box retailers. By early in Q1 2025, we will launch a new decking product called Summit.
Speaker Change: which will feature the same basic SureStone technology with fewer features and benefits designed for a more affordable price point for DIY and small contractor applications.
Speaker Change: Our premium voyage decking products will still be stocked through our independent retail channel and available by special order.
Speaker Change: We continue our development process on other products, too, using the SureStone technology, including trim, pattern, and fascia.
Speaker Change: We expect a soft product launch in mid-2025 when additional capacity is available.
Speaker Change: Decorators will also be launching an entry-level pre-assembled railing product in early 2025.
Speaker Change: Thank you.
Speaker Change: Some other matters of interest include new product sales for the quarter of 118.7 million and year-to-date of 388.4 million. We are tracking close to our 2024 target of 510 million.
Speaker Change: New product development is an integral part of each business unit's strategic plan, and we will continue to increase our investment in this area.
Speaker Change: Our Innovate Venture Fund just closed its seventh investment in companies which are late-stage development or early-stage commercialization.
Speaker Change: These companies have new products and innovative solutions which have potential to be utilized by one of our business units in the future.
Speaker Change: The labor market has improved substantially.
Speaker Change: The U6 Seasonally Adjusted Unemployment Index for September indicates 7.7% unemployment, which means more workers are without jobs.
Speaker Change: While a pool of applicants is larger, the cost of labor remains higher and inflation is making it more difficult for families to make ends meet.
Speaker Change: We continue to be burdened by higher benefit costs for healthcare, driven in part by mandatory coverage requirements and unnecessarily expensive pharmaceuticals.
Speaker Change: In addition, some states run the risk of pricing themselves out of the labor market through new mandated benefits and regulatory burdens.
Speaker Change: On the acquisition front, our acquisition pipeline is growing and we are seeing a bit more realism in valuations from some targets.
Speaker Change: In cases of new geographies and product extensions, when we can acquire a company in a desired runway which yields a better return, we prefer that to a greenfield startup.
Speaker Change: Now I'd like to ask Mike Cole to report on the financial results.
Mike Cole: Thank you Matt.
Mike Cole: Our consolidated results this quarter included 10% decline in sales to $1.65 billion, largely driven by a 7% reduction in selling prices while unit sales declined by 3%.
Mike Cole: The decline in selling prices resulted from a decrease in lumber, as well as a weaker demand environment, which led to more competitive pricing in most business units.
Mike Cole: These headwinds resulted in a 21% decline in our adjusted EBITDA to $165 million.
Mike Cole: Importantly, our adjusted EBITDA margin remained well above historical levels at 10% reflecting the benefits from our strategic decision to align our business around the markets we serve, our improved portfolio mix, and overall strong execution of our operating teams.
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, highlighting the strong returns our business is capable of generating in any market.
Mike Cole: and our balance sheet continues to gain strength with a cash surplus that's grown to almost 1.2 billion this year providing us with ample flexibility to pursue our financial and strategic objectives.
Mike Cole: Moving on to our segments.
Mike Cole: Sales in our retail segment dropped 13% to $636 million, consisting of a 7% decline in selling prices, a 2% decline due to transfers of certain product sales to other segments, and a 4% decline in units.
Mike Cole: The unit decline was comprised of a 3% drop in volume with big box customers while our volume with independent retailers declined by 8%.
Mike Cole: By business unit, we experienced a 5%
Mike Cole: unit decline in ProWood, a 4% decline in Edge, and a 3% decline in Deckorators.
Mike Cole: We were pleased with our overall sales of Decorators Decking, which increased 17%, and continues to experience solid demand.
Mike Cole: Sales of Surestone decking increased 20% and represented nearly half of our composite decking sales.
Mike Cole: The performance of our SureStone product is especially encouraging given our efforts to expand our capacity and increase our marketing efforts.
Mike Cole: Our gross profits declined 11% while gross margins improved by 30 basis points.
Mike Cole: The year-over-year margin improvement resulted from favorable changes in mix and the sustained impact of operating improvements we've discussed throughout the year.
Mike Cole: These positives were partially offset by lower unit sales and negative operating leverage due to fixed costs of manufacturing, as well as the impact of falling lumber prices on our variable price products, primarily ProWood treated lumber.
Mike Cole: Operating profits declined by almost 5 million as the decline in our gross profits was offset by a 7 million dollar decrease in SG&A expenses primarily due to lower incentive compensation costs.
Mike Cole: Moving on to packaging.
Mike Cole: Sales in this segment dropped 11% to $402 million, consisting of an 8% decline in selling prices and a 5% decrease in units, partially offset by a 2% increase.
Mike Cole: as a result of the transfer of certain product sales from retail.
Mike Cole: Customer demand in this segment remains soft and that's contributed to more competitive pricing as we execute our strategy to gain market share. As a result of these factors, gross profits dropped by almost 23 million year over year for the quarter.
Mike Cole: The year-over-year decline in gross profits was partially offset by a three million dollar decrease in SG&A resulting from a drop in incentive compensation.
Mike Cole: Consequently, operating profits in the packaging segment declined by $20 million, to a total of $22 million for the quarter.
Mike Cole: Turn into construction. Sales in this segment decreased 8% to 535 million as a 7% decline in selling prices and a 2% decline in units was partially offset by a 1% increase as a result of the transfer from retail.
Mike Cole: The decline in volume was due to our site-built commercial and concrete forming business units due to weaker demand.
Mike Cole: These declines were partially offset by an 11% unit increase in our factory built unit due to an increase in industry production.
Mike Cole: The decline in selling prices was primarily experienced in our site-built business unit, which along with the unit declines I mentioned, resulted in a $33 million reduction in our overall gross profits for the quarter.
Mike Cole: When combined with a $6 million decrease in our SG&A due to lower incentive compensation, our operating profits declined by $27 million to a total of $42 million for the quarter.
Mike Cole: As we manage through this cycle, each segment continues to focus on executing our long-term strategies to grow our portfolio of value-added products.
Mike Cole: Our year-to-date ratio of value-added sales to total sales improved slightly to 69% this year from 68% last year. And our ratio of new product sales to total sales dropped slightly to 7.2% this year from 7.6% last year, as we've made our criteria for qualifying more stringent, including a higher minimum margin threshold.
Mike Cole: We believe when the cycle returns to growth, we will be well positioned with an improved portfolio of value-added products, supporting higher growth and profitability.
Mike Cole: We're also mindful of our cost structure in this environment
Mike Cole: work to find the right balance of making sure 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 efficiency through investments in technology, and building our brands.
Mike Cole: Our SG&A expenses were below plan and prior year for the quarter, primarily due to lower bonus and sales incentive expenses.
Mike Cole: Given the more conservative outlook we have for demand and pricing that extends well into 2025, we plan to be more aggressive in our efforts to selectively reduce costs and capacity.
Mike Cole: We've targeted an annual run rate of adjusted EBITDA improvements from cost and capacity reductions of $60 million.
Mike Cole: We're currently taking actions that will result in 35 million of improvements in 2025.
Mike Cole: Moving on to our cash flow statement. Our year-to-date operating cash flow was nearly 500 million.
Mike Cole: Last year, our operating cash flow of $711 million was elevated and included a $178 million reduction in net working capital as we adjusted to reduce our inventories from the peak demand of the pandemic.
Mike Cole: Our investing activities included $165 million in capital expenditures, comprising $108 million of maintenance CapEx and $57 million of expansionary CapEx.
Mike Cole: As a reminder, our expansionary investments are primarily focused on three key areas.
Mike Cole: expanding our capacity to manufacture new and value-added products.
Mike Cole: Geographic Expansion and Core Higher Margin Businesses, and Achieving Efficiencies Through Automation.
Mike Cole: Finally, our financing activities primarily consisted of returning capital to shareholders through almost 61 million of dividends and 159 million of share repurchases so far this year.
Mike Cole: This year we repurchased approximately 1.4 million shares at an average price of less than $114.
Mike Cole: Thank you.
Mike Cole: Turning to our capital structure and resources, we continue to have a strong balance sheet with nearly $1.2 billion in surplus cash compared to $957 million last year. And our total liquidity is $2.4 billion, which includes cash,
Mike Cole: and availability under long-term lending agreements.
Mike Cole: With respect to capital allocation, we plan to continue to pursue a balanced approach and return-driven approach as we discussed in the past.
Mike Cole: Our highest priority for capital allocation is to drive organic and inorganic growth that results in higher margins and returns.
Mike Cole: 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.
Mike Cole: We'll continue to opportunistically buy back more stock when we believe it's trading at a discounted value.
Mike Cole: With these points in mind, our board approved a quarterly dividend of 33 cents a share to be paid in December, representing a 10% increase from the rate paid a year ago.
Mike Cole: Last quarter, our board approved another $200 million share repurchase authorization that expires at the end of July 2025.
Mike Cole: We have not accumulated any repurchases under this new authorization.
Mike Cole: $250 million to $300 million in 2024 to capitalize on the automation and higher margin growth opportunities we see in each of our segments.
Mike Cole: So far this year we've already approved 295 million of projects with another 55 million of requests in the pipeline for evaluation.
Mike Cole: 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.
Mike Cole: Finally, we continue to pursue a pipeline of M&A opportunities that are a strong strategic fit while providing higher margin return and growth potential.
Mike Cole: Recently we've seen more activity in the pipeline which is encouraging.
Mike Cole: and we will remain disciplined on valuation.
Mike Cole: As a reminder, our first priority is to grow through M&A, but if the opportunities aren't present or valuations aren't appropriate, we'll pivot to greenfield growth, which we've considered in our CapEx targets.
Mike Cole: I'll finish up with comments about our outlook for the rest of the year. We believe the soft demand and competitive pricing we're currently experiencing will continue for the balance of the year, which will make for more challenging unit sales and profit comparisons.
Mike Cole: Further, we anticipate any reduction in short-term rates will not have a significant impact on market demand and therefore pricing will...
Mike Cole: and therefore pricing until sometime well into 2025.
Mike Cole: For the balance of the year by segment, we anticipate year-over-year demand in retail will remain mid-single digits lower.
Mike Cole: Packaging year-over-year demand will remain mid to high single digits lower.
Mike Cole: and construction year-over-year demand will be down low single digits as strength in our site built unit offsets softer demand in other units.
Mike Cole: Thank you.
Mike Cole: Finally, we believe we'll continue to gain market share in each segment that will help offset the impact of lower demand and strengthen our competitive positioning when demand improves.
Mike Cole: While we manage through more challenging conditions in the short term, we remain confident in our long-term growth and margin potential and will continue to invest wisely to capitalize on these opportunities.
Mike Cole: With that, we'll open it up for questions.
Speaker Change: 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. To withdraw your question please press star 1 1 again. One moment while we compile the Q&A roster.
Speaker Change: Thank you. Thank you.
Speaker Change: And our first question will come from the line of Reuben Garner with Benchmark. Your line is open.
Reuben Garner: Thank you. Good morning, everybody.
Speaker Change: Good morning.
Reuben Garner: Matt, you referenced $70 million in annualized cost reductions. I think there were three buckets to that. Can you help us break down maybe how much are coming from each of those buckets? And then I think the strategic look at a few business units is something that's new. Any more detail on which ones those might be, or is that not an internal rule?
Matt: Yeah, I guess what I would say, Ruben, is when you look at the facility consolidations, they would...
Matt Missad: encapsulate probably all those different buckets of both operating costs and SG&A expenses. So I don't really have a breakdown among the three different groups.
Matt Missad: and Mike may be able to give you a little more detail but I think that's the way that I'm looking at them is they're all they're all connected and that's why I have a headline number for you as opposed to individual numbers by each group or category.
Mike Cole: Yeah, Reuben, and I referenced the 35 million that we're taking actions on today. About half of that is is SG&A reductions.
Mike Cole: and the other half is more capacity consolidation. The 60 target will be probably a similar combination.
Mike Cole: Thank you.
Speaker Change: OK, great and then.
Speaker Change: you mentioned maybe having to get a little more aggressive to take share with the weakness in the packaging industry are there any other
Speaker Change: markets where things have picked up from a competitive and pricing standpoint outside of the
Speaker Change: commodity, whether it's site built construction with multifamily.
Speaker Change: fully rolling over or anything else that jumps up that's specifically increased in competition of weight.
Speaker Change: Yeah, I think what you're seeing in the insight built in some other markets, as demand wanes a little bit, there obviously becomes more competitive pressure and as every
Speaker Change: A customer is looking to try to maximize the value that they're able to deliver. They consistently are looking for reductions wherever they can get them.
Speaker Change: That does create a more competitive atmosphere. And again, I referenced the high line housing starts number of 1.2 million or better. If it drops below that, obviously that pressure gets more profound than if it stays above that level.
Speaker Change: Hey, great. Thanks for the details. Good luck, guys.
Speaker Change: Thank you. Thanks, Ruben. Thank you. One moment for our next question.
Speaker Change: And that will come from the line of Keaton Mamtora with BMO Capital Markets. Your line is open.
Keaton Mamtora: Good morning and thank you for taking my question.
Keaton Mamtora: On the M&A pipeline, you know, are you seeing kind of increased opportunity in, you know, any one of the segments?
Keaton Mamtora: or sort of your appetite for M&A, is it greater in one versus the other, or is it just based on kind of what kind of opportunities presented and kind of the value there?
Speaker Change: Yeah, what we're trying to do, Reuben, is stay within our strategic runways and make sure that we find the best values in each of those runways.
Speaker Change: We're not waiting at any more or less based on the runway. But as Mike pointed out, we're looking for the best value. And wherever those best values are is what we're really going to target.
Speaker Change: And as we said at the end of the last quarter, we have capital allocation model for each of those runways. And as Mike explained, we'll pivot back and forth, either M&A or Greenfield, with a preference being on M&A if the valuations are right.
Speaker Change: understood. And Mike, as you think about, you know, the multi-year capital investment program that you have
Speaker Change: Is there any rethink around the cadence of those investments given the market backdrop currently or is this sort of an opportunity to really kind of reduce costs and position for the upturn?
Mike Cole: I still expect the cadence to be what we've talked about, that billion dollars I assume you're referring to from last quarter. I'd expect that to occur pretty evenly over the next four to five years. Those are the investments that we're needing to make in order to make sure we hit our long-term growth and margin improvement goals.
Speaker Change: understood and then you know
Speaker Change: Within the construction segment, you are taking down Q4 numbers and just back half of 24.
Speaker Change #100: Can you talk about sort of where you saw sort of increased pressure, you know, through this year and, you know, kind of, are you seeing any signs of stabilization in any of the end markets there?
Speaker Change #101: Yeah, that's a complex question, Keaton. I would tell you that the multifamily side of the business.
Speaker Change #101: was softer earlier and I think that's rate sensitive and we're finding out single family is also rate sensitive. I think right now there's just the uncertainty in the economy is probably making it more difficult to predict what's going on in the fourth quarter.
Speaker Change #101: I would expect that that will stabilize better in 25.
Speaker Change #101: Bye.
Speaker Change #102: Long-term mortgage rates are important. The consumer confidence is important and what we're listening to right now is our customers where they're looking at what their their backlogs are as well as what their cancellation rates are.
Speaker Change #102: and how many unsold homes they currently have.
Speaker Change #103: Keaton, if I add maybe a little color by business unit, I want to say that on the site build side, we assumed mid single digits down, which is about right.
Speaker Change #103: factory rebuild we thought would be strong, which was about right. The difference is commercial and concrete forming we thought would perform a little better and that took us from low single digits up last quarter to an expectation of low single digits down.
Speaker Change #103: in Q4. It's not unusual for commercial projects to push, unfortunately, and that seems to be what's occurred in the concrete forming business unit. It is a bit more interest rate sensitive.
Speaker Change #103: I think commercial and concrete form are the reasons for the modest change in the outlook.
Speaker Change #104: Got it. That's a very helpful color. I'll turn it over. Thank you. Thank you. One moment for our next question.
Speaker Change #105: And that will come from the line of Kurt Yinger with DA Davidson. Your line is open.
Kurt Yinger: Great, thanks and good morning everyone.
Kurt Yinger: Matt, at the outset, you had talked or alluded to at least kind of strategic alternatives for some of the business units. Understanding you might not want to talk specifics, I guess.
Kurt Yinger: Could you talk about strategic kind of criteria that would
Kurt Yinger: you know, no longer make a business unit kind of fit into the portfolio that you want to have. And maybe as you look forward a couple years, like what do you envision being a positive outcome related to this process?
Speaker Change #106: That's a really good question, Curt. What I would say is the criteria are pretty basic. We've always had the...
Speaker Change #106: the mindset of looking at an operation that's underperforming and either getting it to perform at an acceptable level or closing it.
Speaker Change #106: Those are relatively easy, straightforward decisions.
Speaker Change #106: One of the things that we've done in the past is we've made opportunistic purchases of businesses that we thought or expected to have synergies with the rest of our business model.
Speaker Change #106: As time progresses, sometimes that proves out to be true, other times it proves out to not be true.
Speaker Change #106: So we may have businesses that are operating profitably that are not aligned with the long-term strategic goals And we don't have synergy relationships
Speaker Change #106: with the existing business units or runways. Those would be the ones that I would expect that we would evaluate here very quickly and make determinations on which strategic alternatives to pursue.
Speaker Change #106: I know it's a bit nebulous, but I think that's really the criteria that we're looking at.
Speaker Change #107: Got it, and I guess just to be clear, like, would selling some of those business units be within kind of the realm of those options?
Speaker Change #108: Yes, I think that that would also be on the table.
Speaker Change #108: Okay.
Speaker Change #109: Got it. Thanks for that. And then, you know, historically, you've shown and talked to were not being a meaningful factor to earnings, even though obviously, it is impactful on the sales line. Is there anything that's changed?
Speaker Change #110: versus the model historically, where, you know, if we were to expect a stronger lumber pricing environment next year, you could leverage that on the earnings line, or is it generally the same message that we've heard in the past?
Speaker Change #111: So I think it's generally the same message that you've heard in the past with the exception being that there may be some efficiencies that we would gain in that environment. And without getting too deep into the various, you know, we believe is the internal hedge we have on lumber market pricing, I do think
Speaker Change #111: We are able to better take advantage of certain efficiencies in a higher lumber market than where it is today.
Speaker Change #112: Okay, okay.
Speaker Change #113: That makes sense. And then just last one sticking on the lumber topic, you know, benchmark prices right now would maybe suggest that it could be higher year over year in Q4.
Speaker Change #114: You know, if we were to see lumber get some momentum here over the next one to two quarters that that could, you know, prove a more challenging dynamic on the gross margin line, or would you expect that you could still pass that inflation through?
Speaker Change #115: Yeah, I guess the simple answer to that one is on our variable price products, I think that actually would help us not hurt us.
Speaker Change #115: Some of the fixed price products that may work in the opposite direction, but given the current demand environment, I think it's on balance to be a net positive.
Speaker Change #116: Okay. Okay. Appreciate it, Keller.
Speaker Change #116: for on the fixed price product side so if you get into the packaging environment if lumber prices move up and prices are fixed smaller competitors are going to have a hard time in an environment like that too so
Mike Cole: Right, okay. Thanks for that, Mike.
Speaker Change #117: Thank you. One moment for our next question.
Speaker Change #118: And that will come from the line of Stephen Guillaume with Sidoti. Your line is open.
Stephen Guillaume: Good morning, gentlemen.
Stephen Guillaume: On the topic of margins, if the market weakens further, what strategies would you guys consider to manage margins effectively? Could you like ramp up any existing margin improvement initiatives?
Speaker Change #120: I think we're constantly looking, Stephen, at ways to improve our margin. We talked about reducing our operating costs, doing facility consolidations to take advantage of capacity utilization.
Speaker Change #120: and trying to to reduce or eliminate certain SG&A costs.
Speaker Change #120: I don't know that there's any other magic items that we can reach to to create further reductions other than what we're already targeting.
Speaker Change #121: Thank you. I guess you also, can you show your perspective on the performance of new products? I think you have, you said like you have some new products coming through in 25. How this like positions you for growth in 25, even if the macro conditions remain somewhat volatile?
Speaker Change #122: Yeah I think Mike pointed out some of the criteria for new products. New products to us have to meet certain criteria from a return and a margin standpoint. So at a basic minimum if they are new products that what I would call our core line
Speaker Change #122: innovations which are replacing an existing product line with a better quality product. We would expect some enhancement even if the demand was the same.
Speaker Change #122: for totally new products, new-to-the-market type products.
Speaker Change #122: those have an opportunity to still be absorbed into the marketplace to gain sales and to gain market share and our goal there would be whatever market share we pick up will come at a better margin profile.
Speaker Change #122: So, those two things would be the keys that I would look at to say the new product initiative is working.
Speaker Change #122: I think what I'd also add is that the R&D effort and the new product development effort within the company
Speaker Change #122: has really been ramped up and I'm excited about what they've been able to accomplish and the cadence for new product introductions is also stepped up. So, as we discussed a few years back, we wanted to get faster at that and I think they're making really good progress on that initiative.
Speaker Change #123: Thank you so much guys. Thank you.
Speaker Change #124: Thank you. I'm showing no further questions in the queue at this time. I would like to turn the call back over to Mr. Matt Missad for any closing remarks.
Matt Missad: Well, I'd like to thank you again for spending time with us today. While the short-term outlook is challenging, long-term, we remain on offense and optimistic.
Matt Missad: Hopefully, we can be like the Lions last Sunday and put big numbers up on the scoreboard.
Matt Missad: It would also help our ability to excel if the referee selected next week protects free enterprise and preserves the constitutional requirements of personal freedom coupled with personal responsibility.
Matt Missad: But that is wishful thinking
Matt Missad: Regardless of the outcome, our team will channel some pop culture icons like Britney, Rihanna, and Depeche Mode and work hard to get what we want. Thank you for your investment in us and we'll keep working to ensure great long-term returns.
Matt Missad: Have a great day.