Good day, ladies and gentlemen, and welcome to the Universal Forest Products Incorporated Third Quarter 2012 Earnings Conference Call. My name is Janaida and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Ms. Lynn Afendoulis, Director of Corporate Communications. Please proceed.

Thank you. Welcome to the Universal Forest Products Third Quarter 2012 Conference Call. Hosting the call today are CEO, Matt Missad and CFO Mike Cole. Matt and Mike will offer prepared remarks then we'll open up the call for questions. This conference call is available simultaneously and in its entirety to all interested investors and news media through a webcast on our website at www.ufpi.com. Replay will also be available at that website through November 16, 2012. Before I turn the call over to Matt Missad, let me remind you that today's press release and the presentations made by our executives include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our 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. At this time, I would like to turn the call over to Matt Missad.

Good morning. Thank you for taking the time to join us this morning. We appreciate your interest. Just to be clear, I will not be giving any kind of weather forecast or other predictions of future events for today's call. Instead, I'll just get right to our third quarter 2012 review. On the surface, I should be disappointed with our third quarter earnings and I am. Earnings are down $0.08 per share from the third quarter of 2011. However, the real story is beneath the surface. We were hit with a one-time Canadian countervailing and anti-dumping duty for imported aluminum to the tune of $2 million. We are appealing this ruling which we believe is unjust on many levels but we have recorded the full charge in the third quarter to be conservative. In addition, we had 2 facilities which had an atrocious performance in the third quarter. While we typically expect a few operations to struggle for a brief period, these facilities were exceptionally bad. The problems causing their poor performance have been corrected and all indications are that these facilities have returned to normal positive results. The difference between normal results and the actual results for these facilities in the third quarter was $2 million. The total of these events impacted pretax earnings by $4 million for the quarter and turned an otherwise good quarter into a disappointing one. As always, I accept responsibility for our total results and we can and will do better. But as a shareholder, I'm also very encouraged by the successes we are experiencing in the vast majority of our facilities. The facilities and their dedicated employees have demonstrated great progress toward our growth and profitability goals. In the quarter, sales increased nicely in 4 of our 5 markets and declined only slightly…

Thanks, Matt. Before I review the financials, I want to point out that the higher level of the lumber market had a significant impact on some of our key numbers this quarters as Matt mentioned. Lumber prices were up 25% on average, which impacted not only our sales levels, but our working capital, cash flow and margins. Starting with our income statement for the quarter, our overall sales increased 13%, primarily due to lumber prices. While we had significant changes within each market, our overall unit sales were essentially flat. By market, our sales to the retail market decreased 3%, due to a 10% decrease in units offset by a 7% increase in prices. Within this market sales to our big-box customers decreased 16%, but this was offset by a 16% increase in sales to our other retail customers. Earlier this year, we mentioned that we lost some lower margin business with one of our big-box customers and one of our objectives has been to replace that business with sales to other retailers. As you can see from the numbers, we've had some success accomplishing that goal. Sales from the manufactured housing market increased 35%, due to a 14% increase in units and the 21% increase in prices. Unit increase is primarily due to industry production of HUD-code homes which increased 11% year-over-year in July and August and the fact that we continue to increase share and add product lines in our distribution business. Sales for the residential construction market increased 34% due to an estimated 20% increase in units and 14% increase in prices year-over-year. By comparison, housing starts to increased -- experience a year-over-year increase of 24% between the months of June and August. The segment is still challenged with excess capacity, so pricing and margins are still…

Thank you, Mike. Now I'd like to open it up for questions.

[Operator Instructions] Your first question comes from the line of Trey Grooms from Stephens.

Could you guys give us a bit more color? I mean, I'm still kind of scratching my head here on what's going on with operating profit or even gross profit for that matter, given the increase you saw in sales. I know, Matt, you kind of outlined a couple of one-time costs, I guess, that were in the quarter. Can you give us a little more color on that? And also kind of -- as we're sitting here today looking forward, if lumber continues to move up, is this what we should continue to expect from a kind of margin standpoint? Or if you could just give us a little color on that?

Yes. Trey, I'll start in on the gross margin number. When you have -- like I mentioned on my comments, when you have much higher lumber prices like you have that are driving the increase in the sales dollars. When you're pricing on a fixed -- pretty much a fixed profit per unit type of formula, you're going to have a shrink in the margin. And that's really what's driving the gross margin decline. So another way to think about it is, unit sales were flat, gross profit dollars were primarily flat. Now that being said, as Matt alluded to in his comments, there's a couple of areas where we were a little disappointed in performance and that -- we could've shown an increase in gross profit dollars from what we're showing today but for that performance.

And could you -- and that was -- what was the impact again? I heard a $2 million number then a $4 million, sorry if I missed it.

No, no. The $2 million was the Canadian duty number and additional $2 million was operating, poor performance issues.

The underperformance is primarily sitting in the gross profit line, Trey. And the loss contingency for the Canadian duty is sitting right underneath SG&A.

Okay. So still $64 million increase in sales year-over-year and if you add that $2 million in, then you're still less than $3 million increase in gross profit. Is there anything else like the business you're walking away from, is that impacting? Or is there anything else that's going on there?

No. Trey, to me, it's the lumber prices. And that's why I pointed it out at the beginning of the call, when you have lumber prices that are that much higher, you're going to get that kind of an impact on the gross margin line. And moreover, when you ask earlier, what do we expect going forward, I mean, to the extent we continue to see that kind of a spread between lumber prices last year and this year, that's going to continue on into Q4 in your expectations.

Okay. And then...

It's not -- we don't view it as a profitability driver. Unit sales drive profitability unless there's some trending in lumber prices. Just the higher level of the lumber prices just makes it looks like large margins are strong.

Got you, okay. And then, Matt, on the last call, you did give us a little bit about of an outlook. You said, this go around, you're not going to be giving us any forward-looking statements at all, I guess, on as far as your outlook. Is there reason behind that? Is it just the level of uncertainty as we sit here today? Or ...

Yes, I think what I'm comfortable with, Trey, is I have a lot of confidence in our people and our ability to execute. It's the things that we don't have any control over that I don't want to try to predict what's going to happen. We'll execute and we'll beat our competition, and that's our goal so.

Okay. And can you at least talk about kind of what you're seeing thus far in October?

I think what we're seeing is kind of a mixed view. If you look around the country, there's certain pockets that are certainly stronger than others. And there's cautious optimism in the housing market. We see that in some markets, we don't see it in others. So to me, I think it's kind of a status quo situation, at least at this point.

All right. And my last question, because you gave us a little bit more detail on the new products you're looking at, rolling out this new technology. Can you -- what's the timing on that roughly? And can you give us a little bit more color on kind of what the distribution channel will look like and that kind of thing?

Yes, we're still in testing, Trey. And as I mentioned, it'll be in the next 12 months, we'll do limited market tests in several different product lines. So I would imagine by Q3 of 2013, Q4, we'll have a very good picture in terms of what the potential market looks like. And distribution channels and how we're going to take it to market.

Your next question comes from the line of Steve Chercover of D.A. Davidson.

Just a couple of quick questions. First, can you expand on the nature of the duties on the aluminum? I mean, is this for some kind of decking material and I guess the U.S. doesn't have a similar problem with the Chinese product?

It's actually -- the U.S. does have a similar problem just in how they chose to enforce it and how they treat the product. It's primarily decking products that we import. And basically, the issue was the Canadian situation without going into much detail is in how they apply the duty in a retroactive fashion and on a product that we don't believe the duty's applicable to.

All right. So there is a chance it could be reversed but the $2 million is the entire potential liability as it stands right now?

That's correct.

Okay. And my other question, given that you ceded low-margin business to big boxes, shouldn't we see your margins go up or will we see them go up going forward, given that you've kind of gotten rid of this business that you don't do for practice?

I think, Steve, that's a very logical question and I would tend to agree with you. I think there's a couple other things that are still sitting out there. We have gotten rid of a lot of low-margin business and overall, we've improved in many areas. There still are capacity issues out there in a number of the markets, so we aren't seeing an immediate rise in overall margin and as Mike pointed out, the lumber market impact on gross margin percentage obviously brings that down. So gross margin dollars should be up and we look forward to continue to try to increase that going forward.

That is a really good question, Steve. I guess the way that I look at it too is, just to add to what Matt said, is we're essentially flat in unit sales but if not for the issues Matt had mentioned on a couple of plants, our gross profit dollars would have been up $2 million, which is pretty good.

Yes. Last quick question. I mean, I know you're not going to give us segmented earnings but could you tell us ranked in order, perhaps, the relative profitability, which is the most lucrative business?

How many competitors do we have on our call today?

I'm sorry we lost the connection a little bit.

No, well, maybe we can take that offline. Maybe there is no answer that you're willing to share. But I just -- if one -- are any of these businesses vastly more profitable than the others or they're all kind of the same?

Obviously, the answer to that, Steve, is yes. But for obvious reasons, we don't want to get into providing that information.

Your next question comes from the line of Robert Kelly with Sidoti.

A question on gross margin. If we look at it on a sequential basis because the level of the lumber market was pretty similar in 3Q compared to 2Q, your revenues were down $60 million or so from 2Q, but gross profit is down $16 million. I mean, how we kind of reconcile the dollar and the gross dollar and the gross profit kind of discussion you had earlier on the year-over-year as far as it relates to the quarter-on-quarter? Are your units down 16% sequentially? And I'm just trying to figure out how it all ends up?

A sequential decline from Q2 to Q3, all other things kind of being equal. Bob, is that I totally expect that. It's -- a lot of that is operating leverage. And so that would not be unexpected at all.

Okay. So I mean, is it utilization goes lower in 3Q? I guess...

Likewise -- and likewise, we probably talked about this in prior calls is, you'd expect the same sort of effect from Q3 and Q4. When our sales drop like that there's so much operating leverage in the business that you're going to get some margin pressure.

Right. Has price competition intensified in 3Q?

No, I don't think it has significantly. I think Mike's right on the operating leverage. There's another dynamic that probably comes into play here and that's the timing of the lumber market rise and fall. And I think what you have is you have some opportunities, at least in the second quarter in this year but based on the way the lumber market grows to enhanced your margin on the buy side. Those opportunities were not as clearly presented in the third quarter, based on the level of the lumber market. So I think that's probably the missing piece, Bob, as you'd look at it is that, that market position we were able to take in the second period.

Okay. So I mean it looks like you had an intra-quarter run on 3Q lumber. It kind of settled down for the past – or the final 4 to 6 weeks. I mean, is that playing into gross margin compression?

Yes.

Okay. As far as 2013 sets up, you go to your fixed cost product customers with pricing soon, is that right?

That's correct.

Is there any opportunity to build in some wiggle room with the lumber level, in the level of lumber market being a little bit a higher in 3Q '12?

Certainly, in some markets but I'd say by and large, there's still that capacity issue and the competitive nature of the marketplace that's not allowing for much in the way of margin enhancement. Now we expect that there may be shortages if the economy turns around and moves forward and that will impact our ability in a positive way. But for right now, I wouldn't want to rely on us being able to have any significant margin enhancement.

And then just one follow-on, in retail building materials, you start to lap the low-margin business that you divested or walked away from in 4Q '12, is that correct?

Correct. Or actually that'll take place in 2013.

Okay. I mean, all else held equal, if you continue to have success in the retail building material, the wholesale distributors and hold share in the big-box channels, would retail building materials grow trend for '13?

Yes, we would hope so.

And at this time, we have no further questions. I would now like to turn the call back over to Mr. Matt Missad for any closing remarks.

Well, again, I'd like to thank all of you for your interest in UFP and for joining us on the call here this morning. While we can't guarantee anything, we do promise to keep forward and to provide the best return for your investment in us. Also I'd like to wish the Tigers good luck and hopefully they'll make it to the World Series. Have a good day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.