Good day, and welcome to the Q3 2022 UFP Industries, Inc. Earnings Conference Call and Webcast. [Operator Instructions] 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 Communications and Investor Relations. Please go ahead, sir.

Welcome to UFP Industries Third Quarter 2022 Conference Call. Hosting the call today are CEO, Matt Missad; and CFO, Mike Cole. Matt and Mike will offer prepared remarks and then answer your questions. This conference call is available simultaneously in its entirety to all interested investors and news media through our webcast at ufpi.com. A replay will also be available at that website. 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. 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 afternoon, everyone. Our top story this week, the [indiscernible] ousted the Dodgers, the Buffalos won their first game and Tennessee upset Alabama. Huge surprises all that some gamblers might love. Meanwhile, it's never a gamble to expect the UFP team to work together to commit to excellence and to serve our customers to achieve a new record for sales and profits in the third quarter. . And with trailing 12-month sales of $9.7 billion, we are just short of our long-term target of $10 billion in sales. Since we plan to stay on offense, we will need to formulate new goals for 2023 and beyond. I'm extremely proud of the UFP teammates who love a difficult challenge and historically exceed the target. In fact, we've built this company to challenge the conventional wisdom and to prove doubters wrong as over our history, we have found ways to perform in spite of obstacles in our path. We have simple goals at UFP. We don't have mission statements, just people on a mission, which is to provide a strong return on investment to all of our shareholders. The fact that thousands of our teammates are also shareholders keeps us all aligned in that goal. Our diverse end markets and balanced business model provides protection from market fluctuations and also reduce the impact of slowdowns in a single market. Over the last several years, we have steadily created more value with new products and services and more efficient operations. Our objective continues to be to expand innovation and move further up the value chain as we evolve from a product seller to a solutions provider. We focus on helping ease a customer challenge by providing a solution, which is a better value both for the customer and for…

Thanks, Matt, and good afternoon, everyone. Our consolidated results this quarter are highlighted by a 5% unit growth, including 3% organic, with all 3 of our segments reporting unit growth; a 46% increase in adjusted EBITDA and related margin expansion of 280 basis points to 11.8% due to gross margin improvement; $535 million of operating cash flow, up $253 million over last year, resulting in a strong balance sheet with nearly $1.5 billion in liquidity and no net debt; and a healthy trailing 12-month return on invested capital of 35%. Now I'll walk through the financial statements for the quarter in more detail, starting with our sales by segment. Sales to the retail segment increased 21%, consisting of a 15% increase in selling prices and a 6% increase in unit sales. Acquisitions contributed 3% to unit growth. Taking into account the transfer of certain product sales from our retail to our Construction segment, our organic unit growth this quarter was 5%. As expected, our unit sales comparisons this quarter were more favorable as our ProWood Sunbelt Edge and Deckorators categories each experienced strong year-over-year organic unit growth. These increases were offset somewhat by decreases in handprint and outdoor essentials as customers reduced orders to address higher inventory levels. Sales to the Industrial segment increased 2%, primarily driven by acquisitions, which contributed 3% to unit growth and pricing, which was up 1%. Organic unit growth dropped by 2%. Consistent with prior quarters, our organic growth was impacted by capacity constraints and as we continue to be selective in the business we take in order to focus on higher-margin, value-added products. This strategy continues to benefit our gross profits and margins, which I'll review shortly. The bridge of our change in organic unit sales includes gains from $12 million in sales to…

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

[Operator Instructions] And today's first question will come from Ketan Mamtora with BMO Capital Markets. Please go ahead.

First question, on the retail side, Matt, can you talk a little bit about how the demand trended through the third quarter? Are there any product categories where demand was kind of more resilient versus product categories where you saw activity start to ease?

Yes, Ketan, I don't know that I have the granular detail on that. I know that there was a little bit slower at the start of the third quarter, but it kind of moved back to what I'd call a typical seasonal demand. So it'd be more typical years prior to the pandemic, and that's what we've seen overall. There hasn't been a specific product category. I know we have some discussion about fencing at the end of Q2. But I don't see that there's a particular product category of any significant scope for us that's drastically different from what the overall general trend has been.

Okay. That's helpful. And then switching to the inventory side, again, with retail focus. We've seen kind of many other building product categories where there is inventory destocking. Can you comment at all, you talked about Deckorators in your prepared remarks. But in general, are you seeing more -- are your channel partners becoming more conservative in terms of how they manage inventories? Can you talk about sort of what discussions you are having with your kind of channel partners as they think about 2023?

Sure. Yes. I think part of it is trying to figure out the conservative piece, I think, Ketan, you're referring to is certainly on the independent side, they don't want to stock a bunch of different inventory items and composite decking tends to be one of those categories where you have multiple lengths and sizes and colors. So it's very difficult for them to stock a whole lot of that. And I think that's one of the things you're seeing in the destocking and some of the other competitors' areas because we self-distribute and we're able to move product around a little easier than, I guess, most. That's less of an issue for us. I think overall, the customers that we have on the big-box side are still very optimistic for 2023. And they're not probably not looking at any increases over 2022, but they're looking at pretty solid performance. So from our standpoint, it's no real change in how they're doing it, although they tend to make different buying decisions at different points in time in the year. So it tends to be a timing issue as opposed to an overall annual issue.

Got it. Okay. That's helpful. I'll jump back in the queue.

That will come from the line of Reuben Garner with the Benchmark Company. Please go ahead.

So maybe a follow-up on the Retail to start, Retail segment. In the release, you mentioned you expect continue -- or continue to expect more normalized demand. So can you help us -- I mean, in the third quarter, I think the revenue number was something like $850 million. And I know when you're talking about demand, you're talking about unit volumes, but with so many moving pieces that might help if you could kind of walk us through, I guess, in the third quarter were the units pretty well normalized and we just need to make the pricing assumption for Q4 and beyond, first off, and then I have a question on the margin as well.

Yes. So the units, I think you're looking at it exactly right, Reuben. I would basically say the units are for third quarter are what I would say are fairly typical of what we'd expect and you have to make your pricing assumptions and apply those to the units.

Okay. And then the second one is kind of tied into the pricing. So last year, a big margin hit in retail in the third quarter. The pricing, at least directionally, has been pretty similar this year and that you started the year at a high level and it fell through the year, but your gross margin performance was much different. Is there more margin pain to come from the price declines? Or were you guys just able to handle it differently. The speed of the decline was different. Can you just talk about the retail margins, Mike?

Yes. Just big picture, let me just chime in on that, I want to give the appropriate credit to our purchasing teams and our operations teams for how they bought material differently in 2023 versus -- or excuse me, 2022 versus 2021. So they deserve an awful lot of the credit for how they time that those buys that helped on the purchasing side. And then on the operations side, how they manage the inventory, helped ease some of the pain that could have equally been suffered again in 2022. But because of the way they handled it, they did a really nice job. And Mike can kind of tie into the margin piece of that.

Yes. You described the markets real well, Reuben. They were very similar, but the timing is a little bit different. So last year, prices ran longer and were up for most of. And then they dropped in June pretty severely, and they continue to drop through July and now into September. So we ended up taking our lumps. We took most of those lumps in Q3 last year in retail. This area was different. Prices started falling much earlier. And we took most of our lumps in Q2. We enjoyed a pretty good Q1. But when prices fall in Q2, that's when we took our lumps, and the market has been more stable, I guess, I'd say, in Q3 this year, and that's why the improvement. So similar markets directionally, but the timing is a little different. Moving into Q4, and yes, prices now seem to be pretty normalized. And last year, we had a little bit of a run-up in prices in Q4. So that could be a difference. After this year, we'll see.

Okay. Perfect. And I want to sneak one more bigger picture question and if I could. So you guys have talked a lot. The company has a history of operating profitably in a lot of different economic environments. I don't hear you guys talking or see any signs of any kind of cost-cutting in any of the businesses right now in this kind of what seems to be a somewhat concerning macro backdrop. Can you just talk about what you guys are seeing or how you're thinking about it there? Is the company just positioned differently today than it's been in the past and you don't necessarily need to? Is it too early? Or I guess, just walk through your thought processes?

Sure. Kind of the company is definitely different than we were during the -- what is called the -- Great Recession. And I think we're much more resilient, as I mentioned earlier, because of the model we have. I think the other part of it, Reuben, is our management team and our leadership team they take actions on a regular basis to make sure that we're staffed appropriately for the capacity we need and for orders. So this is a constant thing with us. It's not -- we never want to have another big event. And hopefully, that doesn't happen where the economy falls out of bed. But our leadership team, like I said, our management team at all of our locations, they have authority and they are very quick to respond to conditions in their markets. So it's not something we need to spend a lot of time or focus on, and they'll adjust as needed, and that's kind of the beauty of the variable cost of our overall structure.

Great. Congrats on another strong quarter, guys, and good luck going into the end of the year.

For our next question. And that will come from the line of Stanley Elliott with Stifel. Please go ahead.

Congratulations. On the industrial piece, you all mentioned kind of PMI and GDP as drivers. Things seem to be hanging in here right now, but obviously look to be slowing into next year if you read some of the forecasts out there. Curious, you guys have made a lot of expansion into new products. You've expanded the portfolio. Do you think that this business will really track like PMI and GDP. Do you think you'll be able to outgrow it? Just curious how you're thinking about all the moving parts there.

That's a great question, Stanley. I think our plan would be to outgrow it because we want to be able to continue to take share. So I think if you just want to look for markers in terms of what the overall market going to look like, that's why we put those data points in there for you to consider. But yes, so I think the way that we're going about it and the outstanding job that the industrial team has been doing by selling solutions and creating mixed material products for the customer base and adding those new products you mentioned, that should allow us to grow faster than the general overall market, and that's our plan.

And switching gears on the CapEx piece. You mentioned kind of at the lower end or below and things getting pushed. I mean do you think that the conditions get any better in '23? And if so, then do you expect kind of like an outsized catch-up year in '23 from a CapEx standpoint? I know you guys have a lot of automation projects, et cetera, going on. Just curious how to think about that versus the cash flow.

Yes. I'll kind of address the supplies part of this situation. I think that the supply chain will ease up in '23. So it will be a little easier to get things more quickly. And I think we're in the midst of our budgeting process for 2023 CapEx. So I don't know, Mike, if you have anything directionally to add in terms of the amounts.

Yes. I think we don't have any amounts necessary to provide at this point. But I'd say the appetite for capital investment is still high. And we still have strategies we're looking to drive in the machine build pallet side and the structural wood packaging side, effective packaging materials as well as other strategies in the Construction and Retail segments. So I think the appetite is going to be high and the challenge will this be continue to work through those supply chains. .

One moment for our next question. That will come from the line of Kurt Yinger with D.A. Davidson. Please go ahead.

Great. I just wanted to start out on the Site Built business, and I was hoping you could talk about where backlogs stand today relative to maybe three to six months ago. And Matt, I think in the prepared remarks, you talked about a little bit of weakness in the West. Is that cancellation dynamic, something that's pretty isolated at this stage? Or do you think that's going to spread to some of the other regions over the next few quarters?

That's a great question, Kurt. I don't really have an answer for you, I guess, what we can tell from what our customers are telling us, and some are committed to continue to build. Others are taking a slightly different approach. And I think the tough part for anyone to measure is while there's contracts out there, which are included in the backlogs, which is part of your question, interest rate hikes can definitely take people out of that mix. So further interest rate hikes and mortgage rate increases will take more people out and will force more cancellations. So I just want to make sure that, that's clear out there. We have no insight into that, particularly. But -- and again, we've had markets that were extremely overheated. So they're -- by slowing down somewhat, they're just getting back to what I'd say is, again, more normalized level. If we think about it in terms of 1.3 million to 1.35 million starts for next year, the balance we have, both in single and multifamily, enables us to attack both of those markets. And we still believe there's a need for housing. It's just how much impact rate hikes have

Right. Okay. That makes sense. And Mike, I think you mentioned that site built gross profit was up almost $40 million this quarter despite units being down 7%. I mean given the softening that we're seeing, are you starting to see that weigh on pricing power and by extension, the margins you expect to roll through that business? Or I guess, any thoughts around that dynamic over the next couple of quarters?

Yes. I think that's our expectation. That, at some point, that does have an impact on pricing depending on the magnitude of the slowdown. And it's -- when you think about the increase in gross profits there, it is two components, right? So it's -- one is just pricing generally, but it's also one of the market trends. And so the cycle area is enjoyed. It's more of a fixed price product. So as lumber prices fall when you have your prices fixed and so you get to the next reset point, they have enjoyed that benefit for a couple of quarters now. So there is that as well.

Got it. And so presumably, the Q4, we see a more stable lumber market at least that component of I guess the pricing and margin story probably will come out.

Yes. That's exactly my point.

Okay. Cool. And then just switching to Industrial, I mean, you've been talking about it for several quarters now, but there's been a lot of noise around lumber and pricing. Could you maybe just give us a few examples of the value-based selling initiatives you've referenced? And how much opportunity do you feel like is still there ahead of you versus just improving mix and moving up kind of the value chain?

Yes, I'll be happy to share some examples without giving any customer names. But -- so what we've seen is a multifactor approach. So as you look at certain customers that we may have been selling over in one part of the company, being able to have one of our industrial engineers and specialists go in with our sales team and solve a problem for one location of that customer. We've been able to expand that to all the national locations at that customer. And PalletOne, that acquisition has been working very, very well with our team, and they have been able to share different customers and provide additional solutions that neither one of us was provided before. And then on the mixed materials side, it's just the whole design and engineering. We've talked a little bit about our Strip Pak product but coming up with better solutions that are less expensive for the customer, but they're more value-add for us. We've seen several examples of that throughout. And to answer the second part of your question, which is where are we on the pathway or the journey, as you will, is we're still in the early innings on that. We have a lot of conversion to do, and I think we have tremendous opportunity to grow. And the other thing I'd point out is this solution piece of it changes every time there's a product change from the customer. So this will be a constant area we think of advantage for us.

Got it. Okay. That's helpful. I appreciate it. And then just sneaking one more in. You talked about some of the profit sharing agreements and you changed the bonus payout last quarter. Mike, as we think about SG&A sequentially into Q4 and into 2023, are there any big variables we should be aware of or I guess, kind of one-off seasonal elements that we should be factoring into the model?

No, I think it's more of the customary things. Kurt, it's more generally Q4, a little bit lighter sequentially than Q2 and Q3, just generally. But then also, you're going to want to factor in so much of our incentives is tied to profitability. So I think we've mentioned before that sales incentives, for example, is roughly 5% of gross profit. So profits are -- gross profits are down from Q3 to Q4, which they generally would it be because it's a slow quarter, you'd want to take that into account and then bonus expense as well. So bonus expenses are around 17.5% and pre-bonus operating profit. So again, Q4 lower than Q3, which would typically be, you want to adjust for that as well. Those are the typical things that we would say. And other than that, I don't -- can't think of anything that would be kind of a onetime adjustment or change.

Got it. Okay. Well, appreciate it and I'll turn it over.

Thank you. For your next question. That will come from the line of Julio Romero with Sidoti. Please go ahead.

Hey. Good afternoon. I've a broader question. You guys have really shown off the balanced business model over the last 1.5 years, but it feels like we're getting off the commodity price for roller coaster, so to speak. So do you think this third quarter is more reflective of true profitability across all three segments or at least the closest we're going to get to normalized that we kind of use as a baseline for how to think about go-forwards?

Yes. I guess what I would say, Julio, is -- and I'll take them by segment. So I'd say industrial is probably about where I would expect it to be. And again, they can make improvements as they sell more value-add versus ticks and panels, I call it. Retail, I think, has areas to still improve, they should be going better. And I would say that construction will probably be a little less robust. So if you kind of take that balance in mind, then I think the third quarter lays out the lumber market factors and some other things kind of more on a general trend basis. But that would be the caveat I would give you is I think Retail will do better. And I think Construction will be somewhat less.

Makes sense. And I appreciate the answer there. I'll hop back in the queue.

One moment for our next question. And that will come from the line of Jay McCanless with Wedbush Securities. Please go ahead.

Matt, thank you for the shout out on my balls. It was a very satisfying win. So other people around the country really like it, too.

Glad you like it.

Yes, absolutely. So not to beat a dead horse, but just to repeat what you said, you said you think 4Q construction is going to be a little bit softer. Retail is going to be a little bit better I guess following on that question, geographically, you guys are pretty well positioned in the single-family residential because you deemphasized the West years ago. But when you think about the existing customers you're selling now, are you seeing them try to take floor plan sizes down or try to get with smaller builds? Has there been any shrink in terms of square footages that we need to think about when we're modeling out for construction?

I think, Jay, that's going to be a natural evolution as they try to target affordability. We're definitely seeing that on the factory, both side. We've seen that for a while there. On the site-built side, I guess what I would point to is multifamily versus single-family. As you tackle affordability, you can't afford a house, you're probably likely to rent. Probably be easier to rent apartments. And I still think the multifamily market, it's been strong, and it surprised me, quite frankly, because I predicted a few years ago that it would slow down as it's historically done but that's been strong, and I think it's due to the affordability factor. So we expect that to remain strong. And again, because we serve both single and multifamily, it works out well for us. And I would just want to point out, the answer that I was giving to Julio was more of a general longer-term answer, not just limited to Q4. So I don't want to mislead anybody that certainly, the retail piece is going to be more in line with what Q4 has historically done in terms of sales. But I think the profile from a margin standpoint will be better in retail and it'll be worse in construction somewhat.

Okay. And actually, multifamily was my next question. Completions, according to the census, which have been, call it, mid-single digits most of the year, had a nice positive pop in September. I didn't know, A, is that a benefit as you get to more completions? I don't know where you guys -- I would assume you guys are at the beginning of the build cycle with multifamily. But as more of these projects that have been ongoing start to get wrapped up and that cash can get recycled, should that potentially be a tailwind for you guys on the multifamily side?

Yes, I think that's a good observation, Jay. It actually should be. I think you correctly pointed out, most of the products that we sell are more early stage in the framing piece, and we do some now on the exterior solutions with some of our new acquisitions. But generally speaking, I think some of the holdups have been things like appliances and other things. But it should actually be helpful for us as there's more completions and more money. I think the counter to that might be higher interest rates, what impact do they have in the future. But for right now, we see it as being very strong.

Good. And then on manufactured housing, I thought it was very interesting in your comment about there being potentially an 18- to 24-month tailwind there. I guess maybe have we seen a new FEMA order? Is there -- are you all hearing potential around a FEMA order for the manufacturers? Just any additional depth you could give around that comment would be appreciated.

Yes. And I think, again, from my perspective, what's going to happen if I follow previous trends of previous hurricanes, there's a belief that things happen immediately and within the first three to six months or something that it's going to be a big boon somewhere. My point was really more about it takes a little longer to get in to get financing. And even if there's orders, they have to be built and shipped and all that stuff. So that's why I'm giving more of a longer-term feel as opposed to kind of an immediate hit because I don't think we're going to see an immediate bump. It takes three to six months just to kind of get the cleanup and I've been down there and see some of the destruction. So it's going to take a while before they're able to even be ready for stuff. So that was more my point there, Jay.

Okay. All right. And then last one, I'll turn it over. The improving labor availability, do you have the opportunity in this market to maybe start nudging that average hourly wage down a little bit? Or is it still pretty competitive from a wage standpoint?

Yes. I don't see wages going down almost regardless of what happens in the marketplace. And I think I tried to allude to that with my inflation comment. When you have energy costs and inflation basically chewing up more than all the wage increases, it puts the employees in a very, very difficult position. So we want to make sure that we're protecting our hourly employees, which is why we want to provide bonuses and try to increase wages as we can because they deserve it. What I would point out, however, is that as opportunities come up and there is more labor, we've tried for a long time to let our people work 40 hours and not have to work 50 hours or 60 hours. So there's an overtime component to that, that likely would be reduced.

And speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Matt Missad for any closing remarks.

Thank you. While my recent visits to our operations in Tennessee, Colorado and Southern California had nothing to do with their team's grid iron performances, my visit to South Florida was sobering. We at UFP are sending our thoughts and prayers to those who suffered in the path of Hurricane Ian in Florida, Georgia and the Carolinas, and the UFP Foundation is exploring ways it can help provide relief. We're committed to helping with the rebuilding process. The scale of destruction spurs us to work harder with our customers to develop creative solutions for affordable housing, whether on a temporary or permanent basis. And these solutions will not be limited to areas affected by the hurricane because they are needed in all areas of the country. We appreciate your investment in us as we continually build a stronger UFP excellence. Thank you, and have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.