Ladies and gentlemen, thank you for standing by and welcome to the Q2 2020 UFP Industries Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker, Mr. Dick Gauthier, Vice President of Business Outreach. Please go ahead, sir.

Welcome to the UFP Industries' second quarter 2020 conference call. 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 opened up for questions. This conference call is available simultaneously, and in its entirety, to all interested investors and news media through our webcast at www.ufpi.com. A replay will also be available at that website through August 22, 2020. Before I turn the call over to Matt Missad, let me remind you that yesterday's press release and today's presentation 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 the company's expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in the press release and in the filings with the Securities and Exchange Commission. I will now turn the call over to Matt Missad.

Thank you, Dick and good morning everyone. I had thought of a hundred adjectives to describe the second quarter of 2020 [indiscernible] phrase that came to mind too, like EMS unbelievable. I even had a Batman movie [indiscernible] yet my favorite and most appropriate terms are grateful and fortunate. I am grateful for the tremendous effort from all of our team members who worked so hard to keep our essential customers by far and kept UFPI moving forward despite all the hurdles. I am grateful to our customers who trusted us to keep them running as they took care of the consumers. And mostly I am fortunate to work with the greatest team in the industry, who performed even better than I could imagine once they were unleashed. I began to work nonstop to make sure we maintain safe working conditions while providing the product and services of customers need. And in spite of their awesome performance none of them are breaking their arms trying to pat themselves on the back. I think they should my long-term belief is that effective UFP is yet to come. I'll briefly review our overall second quarter performance. Our teams produced record net sales of $1.242 billion in Q2, up slightly from 2019. They set a new quarterly net earnings record of $66.5 million and a quarterly EPS record of $1.08 per share. EBITDA for the quarter was $111.4 million, up $20.6 million versus 2019. New product sales for the quarter were $141.9 million and a $243.7 million year-to-date. We are on track to meet our 2020 new products budget. Looking at the segment, the tail-end of the quarter is very different by market as we surmised in early May. UFP Retail Solutions for the shining star with sales of $609 million versus $482…

Thank you, Matt. This quarter provided another solid example of how UFP’s balanced business model and diversified product portfolio is a great advantage in challenging time. Our results this quarter, highlighted by 24% growth in operating profits 140 basis point improvement in operating margins to 7.4%, the 200 basis point improvement in our trailing 12 months return on invested capital to over 15%. Operating cash flow of $147 million more than two times higher than the first six months last year and total liquidity of $562 million at the end of June a $170 million increase since the end of the first quarter. Moving on to highlights from the income statement, overall net sales for the quarter were flat compared to last year and consisted of a 3% increase in our selling prices substantially offset by a 3% decrease in our units sold. Results by segment varied greatly with exceptionally strong unit sales growth in our retail segment, offsetting unit declines in construction and industrial, which were more adversely impacted by the pandemic and stay at home orders. Fortunately for us, this cost the consumers to initiate more home improvement activities, as the quarter progressed, resulting in strong order flow from our retail customers. Breaking down our sales by segment, sales to the Retail segment increased 26%, consisting of a 22% unit increase, and a 4% increase in prices. Organic unit growth was 21%, driven primarily by our ProWood Outdoor Essentials and Dimensions business units. New product sales for the retail segment were also strong, growing by nearly 16%. Sequential demand trends within this segment continue to remain strong. Sales for the industrial segment were impacted by stay-at-home orders as businesses of many of our customers weren't deemed essential. Travel restrictions also impacted our ability to gain share, adding new…

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

[Operator Instructions] Our first question will come from Ketan Mamtora with BMO Capital Markets. Please go ahead

Thank you. Good morning Matt and Mike and congrats on a very strong quarter. Starting off on the retail side, Matt can you talk a little bit about the strength that you saw in June? Has that continued into July as well if you look at some of your sort of key end markets and products, whether it's on the ProWood side or the Deckorators, the Outdoor Essentials side, maybe just give us some sense? I know you would not want to get into sort of specific numbers, but at a high level, what you are seeing thus far in July, because there has been some sort of concern that a lot of this on the DIY side especially is pull forward in demand versus kind of fundamental improvement in demand. So maybe just give us some sense of what you are seeing.

Yes, it's a good question Ketan. I think as we look at it, I would say that from a high level view the demand profile is still very strong and you can kind of look at lumber market and see that the demand for that product continues to remain strong, so that's a good indicator from our standpoint, I think there's a lot of people who have projects that have not been able to get the materials, they need. So, we expect that demand to continue. As I mentioned before, at least the next 30 days to 60 days and could very well continue beyond that. But it seems to be strong at this point.

And then on the Deckorators side, is it possible to quantify the capacity increase that you all are looking at, which is going to come on later this year?

Yes. I believe the capacity increase is going to be somewhere between 25% and 35%.

Got it. And so, all of that will be available spring of next year I'm assuming, is that how I should be thinking about it?

Yes.

Got it. And then on the e-commerce side within retail, is it Matt to quantify how big that is within the retail side?

Well, it's possible, but we haven't really broken it down at this point Ketan. So, I can only give you the high-level perspective on it, and I think as I mentioned in the remarks, what we're seeing is more people that are working from home, probably are looking around their houses and seeing all these projects that need to be done, and so they're ordering online and that's really, really helped to explode our e-commerce initiative.

Got it. And then just one more on the lumber side obviously, you've seen a big spike in both Southern Yellow Pine and SPF prices; from what you are seeing, all the curtailments that happened in late March and April has that all come back online or is there some that is still ramping up based on what you are seeing, can you give us some sense?

Yes, I think there has been - most of that, if not all of it is back online now, whether it's running at full capacity I couldn't tell you, but I do believe that the demand is there, and it's outstripping the capacity and it's going to take a while for that to catch up, but as with any kind of market move, it's always a difficult challenge try to guess exactly when that's going to happen, but our team has done a great job of managing their inventories and managing their purchases and working with the various mills, both domestic and foreign to try to make sure that we have at least enough product to meet the demand as best we can.

Our next question will come from Steve Chercover with D.A. Davidson. Please go ahead.

You almost gave me a flashback with your Batman reference. Yes, thank you. So it's extraordinary that sales and retail actually accelerated in the quarter to June exit rate of 47% growth. And I guess, intuitively I would have thought that DIY projects would have tailed off as people went back to work, but you're saying it's going to be strong for at least the next 30 days to 60 days. So, have you had any shortages in your raw materials such as Southern Yellow Pine, the cap sales from being even stronger?

Yes Steve. I think that's been one of our challenges during the quarter. As we mentioned the mill curtailments impacted it, but yes, we believe we could have sold and I can't quantify, but we could have sold significantly more had we had material available.

Okay. And so numbers still going parabolic, will you do anything at some stage to protect yourselves? So when lumber eventually hits the top and reverses?

Well, we certainly will, we certainly are. We're very cautious about it, we're probably sacrificing a little bit of margin today just to make sure that we don't get into a negative situation and we work with our vendors, very much with our vendor managed inventory programs to help alleviate some of that potential risk.

And I know you said you have no safety stock on hand. So, is the way to protect yourself basically by turning the inventory as rapidly as you always do?

Correct.

Okay, thank you. And then in industrial and construction, absent any backslide in reopening, do you think that the trajectory should improve throughout the quarter could get you back to flat or even modest year-over-year growth in the current quarter?

I think that's a great question. I'm not sure I have the right answer to that one yet, Steve, I think that would certainly be our hope. But it really just depends on how quickly things ramp up - the trend line is very positive. We expect that trend line to continue, I can't tell you whether or not it's going to be back to year-over-year by the end of the Q3 or not, but we still see very positive improvement trends.

Our next question will come from Reuben Garner with The Benchmark Company. Please go ahead.

So, the gross profit - you guys a negative ratio makes my charts kind of tough. But the gross profit growth, it was very impressive in the quarter. I guess - I understand the retail elements of it. Can you help me on the construction in the industrial side the margin improvement that you saw there even with, if I recall correctly, prices were up in both of those segments? So, I guess that was a headwind volume being down also headwind is it just mix that's an offset there, was the lumber movement within the quarter a driver in those two segments as well, or is that just, I guess just tell me how you got margin improvement in construction and industrial in the quarter, if you could?

Yes. So, let's start with construction. I think a lot of that has to do with mix in the construction space, it also has to do with probably a year-over-year comparison, where we had some jobs that were unprofitable in 2019 that impacted gross profit negatively. We obviously didn't have those in 2020. So, there is an improvement there. So overall, I would point to the mix shift as being the bigger driver on the construction side. On industrial, I would say that mix is a part of that issue, some manufacturing efficiencies are part of that issue. And I would also point to kind of customer concentration and customer mix as well. As we talked about at the end of Q1, we were looking at our customer base in the industrial market and there is a number of customers that were relatively modest size and unprofitable, and I think the industrial team has done a really good job of working to either make those customers profitable business or actually we've moved on, and probably priced ourselves out of some of those types of opportunities. So, little different story between the two segments, but I think they're both really positive trends that we hope we can keep moving forward on.

Okay. And then on the growth side for those two segments, I mean you've got the pull forward question on the retail side is the inverse possible with the construction and industrial business where some of the activity in the second quarter was maybe not canceled, but delayed and you could get some catch up hold you over until there is an economic recovery or do you think a lot of what would have been in the second quarter is probably been canceled in those two segments. I know there's a lot of moving parts, but the best you can if you can help with that.

Sure. Yes, I think construction definitely is just kind of a delay, unless something else fundamentally changes the projects that were proposed need to happen and so I expect those to continue moving forward. And so I look at Q2 is just kind of a pause as I mentioned in the remarks there might be some issue down the road with a lack of available lots simply because that the homebuilders stopped developing for a period, there but I think that is very positive trends for construction and on the industrial side, I think there is a large demand that was unmet for a lot of those durable goods, we mentioned that things were shut down for a period of time and there is a shortage and those products to a lot of which go into housing projects HVAC systems being an example. So I think that there is a catch up that should happen in the industrial space as well. The only issue from my perspective is how long it takes to kind of get caught up. And back to that normal

Okay, great. And I must stick one more and I got to ask my quarterly Deckorators question. So the. I think if I heard you correctly, down just 1% in the second quarter year-over-year. I know last year, the first half, you had the load in with lows to comp against. Is there any way to think about kind of what the underlying organic growth was for that business? And did you miss out on any business there because the capacity issues and this is a lot of questions in one but is the capacity that's coming online in early fourth quarter. Is that a pull forward of when you were? I know that's something you've already announced, but is that a pull forward in timing because demand has been so strong.

Yes, I think probably the same story is true, although to a lesser extent with Deckorators product lines. I think product availability certain colors certain styles was impacted a little bit and the demand flow was a lot different than we probably would have predicted at the beginning of the year. But the idea of creating more capacity. We know that the products are selling well. We're excited about where that's going and as we pointed out, the Deckorators fault and Voyage product lines that with the Eovations technology that has a growth trajectory. That's greater than the rest of our product lines to so lot of opportunities there for us to grow and improve

Our next question will come from Julio Romero with Sidoti & Co. Please go ahead, sir.

My first question was on the cost control side. Great job on the SG&A leverage with the 42% there. How much of that do you think maybe was due to maybe some temporary factors maybe some inefficiencies from customers and that type of thing or maybe cutting some manufacturing expenses that are kind of on the temporary side versus maybe some of execution their performance under teens part

Yes, I don't know that I can really quantify that for you Julio with into the different categories. We do know that there were some, that I think are more permanent in nature. Some of the efficiencies that we came up with I think the travel issue that I called out is one that part of that will be permanent and part of that will be temporary that has been a fairly significant driver for us. And obviously sales volumes being what they were in the gross profit dollars being what they were definitely helps that trend lines as well. It's not all just on the cost side part of it on driving the gross profit dollars higher to make that percentage improve Mike, do you have anything to add on that.

And I guess if you could talk about any changes on the competitive landscape. I think you're a little better capitalized than maybe some of your competitors, have any opportunities kind of become clear to you as you progressed throughout the quarter?

Yes, I think there is a lot of opportunities, and as I said before, I think with uncertainty comes opportunity and I think people are concerned, short-term and so for us, it creates a number of opportunities to pursue the business units, strategic plans and we really hope to be able to accomplish some more of that over the next several months because I think it is a good time to try to reach our targets and some of the other competitors are in a spot where it makes more sense for us to continue to drive and expand.

Understood. And then last one from me is, can you talk about maybe T&R Lumber and how it fits with the industrial segment. And do you still see a pipeline of tuck-ins and are the multiples potentially becoming more attractive there? Thank you.

Yes good question. So T&R really fits nicely into our industrial family of companies that are very complementary, they actually have some products and relationships that we don't have and we look forward to being able to scale their capabilities throughout our entire network which is one of the attractive features of their company. And they have terrific people as well and we always are looking for good people. So it's a really nice combination. In terms of multiples and where the market going again, I think as I mentioned, there is uncertainty. So we would expect that multiples may - there is also a number of issues in terms of what performance has been given COVID and other things for these other companies that are looking to market themselves. So we're not at a spot yet where I think we can predict that multiples are going to go down or up or whatever but I think for us, we have a better insight in terms of what we're trying to accomplish. And to the extent that people are ready we're standing by ready to move forward on transaction

We do have a follow-up question from Ketan Mamtora with BMO Capital Market

Thank you. Maybe just taking a slightly different tack on Steve's question on sort of the construction side of the business. Within sort of the construction side, Matt, are you seeing any specific end-markets that are doing a little better than some of the others. Obviously in Q2 site build, factory build, commercial all were hit quite hard, but are you seeing sort of a faster recovery in any one or nothing that you can call out. I'm just curious.

Yes, I think Ketan from our standpoint, our site built operations are very much regional in nature. And so, I think we have selected the right locations to be in site built. So the improvement there, which may or may not reflect what is happening nationally, but the markets that we're in are still very strong both single-family and multifamily, so that's one area where I would call that out. And as we mentioned, commercial have been impacted probably more negatively than other areas and expect that trend to continue, although I do expect commercial to continue to improve. Yes factory built as we did call that out, it’s down pretty significantly, and I think that was due in large part to mandated shutdowns so as that recovers, I think there is an opportunity there as well.

And then just turning to balance sheet and capital allocation, you got a net cash position, which is obviously a great position to be in especially in these times? But as you kind of look ahead, maybe just talk about the priorities you've talked about M&A and but also said that you all will really disciplined? So just talk about capital allocation priorities and where does kind of dividend fit in, in this, and if you would be open to doing something like a special dividend or like a one-time dividend at some point in time?

Yes, I think Ketan that's a great question. And obviously, our goal is to make sure that we provide the very best return to our shareholders. We have a number of growth opportunities both within our capital expenditure bucket, as well as our acquisition opportunities that we think will yield the best long-term growth for our shareholders. That's where we want to dedicate the vast majority of the capital. To the extent that we're not able to do that on a good cost effective and a strong ROI basis, our natural reaction is to return that capital to the shareholders. So I would say that right now we have an ample pipeline. We have a lot of projects, part of our new structure that I think is going very, very well, is that each of our leadership teams has identified different areas where they see opportunities to really drive ROI. And until they run out of those types of opportunities, I would guess that's where we put most of our capital. Looking at different things with the dividend and making sure that that provides a reasonable return to our shareholders, we'll continue to do that as well as we continue to grow cash flow and grow our bottom line performance.

And speakers I'm showing no further questions in the queue at this time. I'll turn the call back over to management for any further remarks.

Once again, I'd like to thank you for spending your time with us on the call this morning. I apologize for the bumpy recording information that was out first, but hopefully I sound better live. We all know that the impact of COVID and the response to it are going to continue, but we're very encouraged by the opening of baseball season. It's a symbol, and we look forward to - with optimism to a return to more normal activities for all of us. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.