Ryerson Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 7 speakers on the call.

Operator

Good day, and welcome to the Q2, 2003 UFP Industries Inc. Earnings Conference Call and Webcast. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker, Mr. Dick Gauthier, Vice President of Investor Relations. Sir, the floor is yours.

Speaker 1

Welcome to the Q2 2023 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. This conference call is available simultaneously in its entirety to all interested investors and news media through our website atufpi.com. A replay will also be available at that website.

Speaker 1

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.

Speaker 2

Thank you, Dick, and good afternoon, everyone. We appreciate you joining our Q2 2023 earnings call. Q2 was like a steeplechase run with plenty of hurdles and other obstacles and some competitive pressures thrown in for good measure. Our team definitely gave it their all and like Kenneth Rooks, They persevered and came out ahead at the end of the quarter. Our earnings of $2.36 per share exceeded estimates And EBITDA margins remained strong in spite of lower sales volumes.

Speaker 2

In addition to the financial metrics, This quarter helped demonstrate the strength of the strategy, business models and ability to react quickly to market changes. We set a high bar for ourselves and pour our energies into exceeding it. The value of the balanced business model proved itself in the results. Some business units faced tough economic environments while others did not and performed better. But our diverse mix of end markets and customers helps fuel long term test while providing strong returns.

Speaker 2

We continue to see the positive financial effects of our 2020 restructuring and increases in value added product mix, which have driven more focus and better returns than in similar periods in the past. As a result of these improvements and our long term optimism, we are pleased to report that our Board has increased the cash dividend for September and increase the share repurchase authorization for the next 12 months. As evidenced in the first half of the year, 2023 will not be a smooth year. Some of the macro factors which affect our strategies include: 1, interest rate hikes which notched upward last week. The status of future hikes is uncertain.

Speaker 2

While another hike is possible this year, something about an election year and interest rates leads me to believe that rates are more likely to fall sometime in 2024. 2, new housing starts, which were a roller coaster during the quarter based on seasonally adjusted monthly data. However, in most of the markets we serve, demand has been resilient. 3, capital, which will be at a premium in a higher rate environment. And fortunately, we have ample capital for both our growth plans and for Turning more to our shareholders.

Speaker 2

4, M and A activity, which has slowed somewhat as targets and buyers try to determine the new normal. We have gotten more specific about our targeted runways for acquisition growth and remain patient capital allocators. I believe more opportunities will become available at better values than are currently being sought by many targets. And lastly, lumber market pricing, which appears to be fairly stable for the near term. Now let's review segment performance and outlook.

Speaker 2

In the retail solutions space as a value added manufacturer, seller and self distributor, our products provide solutions for the DIY consumer as well as the professional contractor. Our Retail Solutions segment continues to refine its strategies and organization and has developed a plan to consolidate its business around 3 main business units: ProWood, Deckorators and UFP Edge. Some of the macro factors affecting retail are: 1, the repair and remodel revenue is expected to be down 3% for 2023 2, lumber market is significantly lower than 2022 resulting in lower sales dollars. 3, consumer confidence level is 10 points below that On the positive side, 24,000,000 homes will reach prime remodel years by 2027. The fact that fewer homes are available for sale has helped bolster new construction, which helps construction and to a lesser extent retail solutions.

Speaker 2

And repair and remodel spending is expected to pick up again in 2024 2025. In the Q2, ProWood and Sunbelt sales were stronger than anticipated with unit sales up 2% overall and up 8% with big box customers. While still well below our reasonable targets, margins improved significantly from the terrible levels in the Q2 of 2022. The team continues to strengthen its focus on building the ProWood brand and using its Performance Solutions product development team to create better treatments, which enhance the performance, appearance and durability of wood products. Deckorators is expanding its product development team to speed innovation to market using its patented mineral based technology, which has considerable opportunities for growth.

Speaker 2

Just last week, the Board approved an additional $31,000,000 in capital expenditures to further expand capacity by approximately $90,000,000 while increasing efficiency and material utilization. And we now have over 900 certified decorators installers who continue to be the greatest cheerleaders for the products. Overall, our retail solution strategy is simple provide innovative new products and solutions find, expand and harness opportunities select and build the right brands and utilize our national reach, purchasing expertise and distribution network to provide the best customer value. In the construction segment, the site built business unit has performed very well in the down market and has been able to grow multifamily business to help fill production. We are currently operating near functional capacity in many of our site built facilities.

Speaker 2

We are serving our existing customer base extremely well and we have added sales focus on new customers and new products. The site built team aims to be different by challenging the conventions in the industry and developing more innovative products and utilizing more innovation to help solve customer challenges. We are implementing the newest technology innovation in one of our facilities and we'll be monitoring the results before we expand it to others. We are consolidating an existing facility in Belchertown, Massachusetts into our new Chicopee, Massachusetts facility, which has a much larger footprint and double the capacity to better serve customers in the New England and nearby markets. On the factory built business unit, they experienced dramatic sales declines as customer volumes And lumber prices remained much lower than last year.

Speaker 2

For example, the RV industry production is down over 50%, Although we still believe we have growth opportunities in that market since it is such a low percentage of our overall sales. We have created a new brand for RV products called Rec Create. This business unit is growing in its new product portfolio to drive value added for our customers. We also believe the outlook for factory built should improve in the second half of twenty twenty three as dealer inventories get more in line with demand. Again, overall for We will rely on our experienced management team to guide the business through any uncertainty and to continue to produce strong results.

Speaker 2

In the Packaging segment, Structural Packaging is continuing its path towards standardization at its facilities since the restructuring. We expect to gain more efficiencies in manufacturing, engineering and sales as we drive a holistic approach across the organization rather than each facility being a jack of all trades. Pallet 1 has seen an oversupply of used pallets in the market, which has put pressure on new pallet pricing. Customers who have heavier inventory of high priced pallets will struggle in the near term and the competitors will also struggle. The long term outlook for UFP Packaging remains strong.

Speaker 2

We will continue to invest in automation, innovation and acquisition to advance our goal of becoming a global packaging solutions provider. From an economic outlook, we Some of the packaging runways to grow, while others are down slightly. Our estimate overall for packaging is down mid single digits in units. On the international front, our team is growing their solutions offering to both our domestic customers in those countries as well as multinational customers operating in the countries we serve. We continue to evaluate growth opportunities in our existing markets to gain share and add to our portfolio.

Speaker 2

Some other areas of interest are new products. New product sales for the Q2 were $188,700,000 and year to date were $352,700,000 We are behind our annual target of $795,000,000 due in large part to the lower level of the lumber market pricing. New product development is an integral part of each business unit's strategic plan and our investments in innovation and acceleration should bear more fruit in the months and years to come. Over 10 of our new product categories are each expected to generate more than $20,000,000 in annual sales in On the raw materials side, the lumber market declined during the quarter and then started trending upward in the last few weeks of June. We do not expect significant volatility, especially when compared to prior years, although we do expect that the mills are actively managing their Supply side to strengthen their margins.

Speaker 2

Inventory. As we shift to more value added and higher margin items, we know that inventory turns are generally not as TIE for value added products as they are for commodity type products. We are focused on having the right mix of products and inventory, working with customers to improve forecasting and working with our supply chain to reduce the amount of safety stock we need to have on hand. Transportation has generally been more readily available, although operating costs have remained at elevated levels. And Human Capital, we note that the U6 unemployment index was up to 6.9% at the end of June versus 6.7% at the end of the Q1.

Speaker 2

More applicants are looking for work, but finding quality employees is still a challenge. Our system of providing growth opportunities for internal candidates together with training and advanced education resonates well with our teams. Tying additional incentive pay for hourly teammates to performance has been very well received and drives improved engagement and overall financial results. We also continue to promote the next generation of leaders and train others to ensure that talent levels can match our strategic growth plans. Now, I'd like to turn it over to Mike Cole to review the financial information.

Speaker 3

Thank you, Matt. Our consolidated results this quarter include a 30% drop in sales to 2,000,000,000 consisting of a 22% reduction in selling prices, primarily due to the decline in lumber prices we passed to customers and an 8% decrease in units, a 32% drop in operating profits to 193,000,000 resulting in an overall decremental operating margin of 10.7 percent which was more favorable than the 15% to 20% range we originally estimated for the year. And adjusted EBITDA margin that improved by 50 basis points to 11.5%, demonstrating the progress we've made since our management structure change in 2020, which enhanced our ability to offer new products and value added solutions to customers in each of our business units. In annualized year to date return on invested capital of 25.5 percent which is 2.5 times our weighted average cost of capital. A $231,000,000 improvement in operating cash Low compared to last year as lower volumes and lumber prices reduced our seasonal increase in working capital.

Speaker 3

And a balance sheet that continues to gain strength with a net cash surplus of $425,000,000 this year compared to net debt of $191,000,000 last year. By segment, sales in our retail segment dropped 18% to $920,000,000 consisting of an 18% decline in selling prices and flat unit sales. Given market conditions, our unit sales held up well this quarter, primarily driven by our Pro Wood and Deckorators business units. Our unit sales to big box customers were also up with an 8% increase for the quarter, while our business with independent retailers, which we believe is more closely correlated with new housing starts dropped by 16%, which was in line with expectations. Our retail operating profits increased to over $60,000,000 this year, a 145% increase from last year.

Speaker 3

Last year, our retail segment which which has a sales mix heavily weighted toward variable priced treated lumber was adversely impacted by sequential trends in lumber prices that dropped from over $1300 per 1,000 at the beginning of the quarter to less than $600 per 1,000 at the end of Q2. Fortunately, we haven't had the same challenge in 2023. At the beginning of this year, we indicated our retail segment was well positioned to report an increase in operating profits for the year. Their strong performance in Q2 resulted in a $5,000,000 increase in year to date operating profits and we believe this segment is well positioned to build on this momentum in the back half of the year. Moving on to Packaging.

Speaker 3

Sales in this segment dropped 28% to $488,000,000 consisting of a 21% decline in selling prices, a 9% organic unit decrease and acquisitions which contributed 2% to unit volume. Customer demand is currently softer than we anticipated at the beginning of this year, which has also contributed to competitive price pressure. As a result of these and other factors, operating profits in our Packaging segment dropped to $57,000,000 a 40% decrease from last year, resulting in a decremental operating margin of 19.8%, slightly better than the low end of the 20% to 25% range we estimated for the year. Also since most of the products we sell in this segment are at a fixed price for a period of time falling lumber prices contributed to higher profits per unit last year. Sequential comparisons of sales and operating profits from Q1 to Q2 of 2023 provides us with cautious optimism that demand and pricing pressure in this segment have stabilized.

Speaker 3

Turning to construction, sales in this segment dropped 44 percent to $550,000,000 consisting of a 26% decline in selling prices and an 18% decrease in units. As expected, the unit decline was due to our site built and factory built businesses whose units declined 14% 20% respectively. Lower volumes and more competitive pricing caused the operating profits in our construction segment to drop to $62,000,000 a 53% decrease from last year resulting in a decremental operating margin of This was again better than the 20% to 25% range we estimated for the year for the full year. Last year in Q2 through Q4, the construction segment benefited from the drop in lumber prices I mentioned earlier because its sales are more heavily weighted to products with selling prices that are fixed for a period of time. Peak demand and capacity constraints also can allowed the team to be more selective in the business we pursued last year.

Speaker 3

As we manage through this cycle, each segment continues to focus on executing our executing our strategies to grow our portfolio of value added products and we're pleased to report an increase in our ratio of value added sales to total sales to increased to 9% this year from 7% last year. We're confident these efforts will continue to help us achieve our minimum EBITDA margin target of at least 10% and help us continue to enhance our profitability and competitiveness over the long term. We're also mindful of our cost structure in this environment as we ensure the company is appropriately sized relative to demand, while still providing the resources needed long term strategies that enhance our ability to offer value added solutions and drive innovation. Our SG and A expenses came in under plan and declined nearly $10,000,000 or 5% this quarter, primarily due to lower bonus and sales incentive expenses. Moving on to our cash flow statement.

Speaker 3

Our cash flow from operations was $321,000,000 a $231,000,000 improvement over last year due to lower seasonal working capital requirements resulting from lower volumes and lumber prices. Our cash cycle for the quarter increased to 60 3 days this year from 58 days last year due to a 2 day increase in our receivable cycle and a 3 day increase in our inventory cycle. While we've experienced a slight delay in payments from certain customers, our overall receivables are in good shape with over 93% current. Our inventory cycle is above historical trend and is an area of focus as we reset our safety stock levels for the improvement and availability of supply and adjust for the impact of the lower demand environment. As we move into Q3 and Q4, we anticipate a more typical seasonal decline in our net working capital.

Speaker 3

Our investing activities included $85,000,000 in capital expenditures. Our capital investments are primarily focused on 4 Key areas: 1st, expanding our capacity to manufacture new and value added products, primarily in our Packaging segment and Decorators business unit 2nd, geographic expansion in our core businesses 3rd, achieving efficiencies through automation and enhancing the working conditions in Our plants in all segments and 4th, increasing our transportation capacity as we continue to transform this function from a cost center to a profit Finally, our financing activities included returning capital to our shareholders through more than $31,000,000 of dividends and more than $55,000,000 of share buybacks so far in 2023. Turning to our capital structure and resources, we continue to have a strong balance sheet with $425,000,000 in surplus cash in excess of debt compared to $191,000,000 in net debt last year. Our total liquidity was nearly $2,000,000,000 consisting of surplus cash and availability under our credit facility and a shelf agreement with certain long term lenders. The strength of our cash flow generation, conservative approach to managing our capital structure and prudent return driven approach to capital allocation continues to provide us with an abundance of capital to grow our business and also return to shareholders through different cycles.

Speaker 3

We'll continue to pursue a balanced and return driven approach between dividends, share buybacks, capital investments and M and A. Specifically, our Board approved a quarterly dividend of $0.30 a share to be paid in September, which represents a 20% increase in the quarterly rate. We have a new share repurchase program approved by our Board of Directors providing us with the authorization to repurchase up to $200,000,000 worth of shares until the end of July 2024. We're currently planning for total capital expenditures of $175,000,000 to $200,000,000 this year, which is lower than our original estimate due to long and variable lead times that continue to impact timing. And we continue to pursue a healthy pipeline of M and A opportunities as we target companies that are a strong strategic fit and enhance our capabilities and competitive position while providing higher margin, returns and growth potential.

Speaker 4

That's all I

Speaker 3

have on the financials, Matt.

Speaker 2

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

Operator

Thank you. One moment while we compile the Q and A roster. Our first question will come from the line of Kurt Yinger with D. A. Davidson.

Operator

Your line is open.

Speaker 5

Great. Thanks and good afternoon Matt and Mike.

Speaker 2

Hi, Kurt.

Speaker 5

Just wanted to start off on retail. I mean, it sounded like ProWood, Sunbelt and Deckorators all had Pretty good quarters there, but volumes were flat. Can you just talk about kind of some of the offsetting units business unit segments And anything of note there?

Speaker 2

Yes, I would say it's probably driven primarily by UFP Edge. Their volumes were down considerably.

Speaker 5

Got it. And is that any destocking or anything specific or just, I guess the overall market environment.

Speaker 2

Yes. I think there's a couple of different factors there. One is, I think As we look at where UFP Edge is going, they're driving it more towards their higher end products and less on some of the just pure finishing items. So that's going to help. It's

Speaker 1

going to

Speaker 2

help in the future, but it's got a sales impact that's happened this year so far.

Speaker 5

Got it. Okay. That makes sense. And then you had a nice bounce back in retail gross margins, but I think you referenced that those were still below target levels. And maybe you could just talk about what you think will kind of help bridge Maybe the ProWood and Sunbelt business units specifically, from where they are today to where you're kind of Hoping to push to from a margin perspective.

Speaker 2

Yes. I think it's been a consistent struggle. We've talked about The value add that we believe is in our treated lumber products both with our preservatives, our fire retardant And some of the new treatments that we're developing within the Performance Formulation Solutions Group. And I think that will certainly help. We saw through the pandemic that the end consumer is willing to pay a fair value for the product.

Speaker 2

And so from our standpoint, it's a matter of us making sure that we're delivering the value And selling the value and that's a real big focus for us is to help drive that profile up Through the customer base and ultimately for the consumer to give them better product, better value, but a better margin for us.

Speaker 5

Okay. And then just lastly, I think you referenced kind of being at capacity in terms of Site built and I assume that's with kind of manufactured products and the like. Any plans to kind of add greenfield facilities or any targeted kind of capacity expansion investments there?

Speaker 2

Yes. I think as we talked a little bit about we talked about automation in one of our larger facilities. We talked about adding the Chicopee, Massachusetts facility. We're looking at adding capacity in other areas. So that's certainly part of it.

Speaker 2

I think We talked and I tried to differentiate a little bit between functional capacity and actual capacity. I think, I know not all the facilities are running 2 shifts. So Adding a second shift is still a possibility for some of them. But I think for us it's been a pleasant surprise that there's that much Demand and so who knows how long it will stay that way, but we're very pleased with it so far and the outlook From our customers has been very strong as well.

Speaker 5

Okay. Well, thanks for that Mike and or sorry, Matt, and good luck here in Q3 guys.

Speaker 4

All right.

Speaker 2

Thank you, Kurt. Thanks, Kurt.

Operator

Thank you. One moment for our next question. And that will come from the line of Stanley Elliott with Stifel. Your line is open.

Speaker 6

Hey, Matt, Mike. Thank you guys for taking the question. Hey, Cameron. Hey, on the site build, kind of going

Speaker 2

back to

Speaker 6

that, Was that more multifamily that you're seeing a lot of the strength? And then I guess the other part would be, How easy is it for you to flip these or not flip, but switch over production at some of these facilities between single family and multifamily In the event that multifamily starts to tail off.

Speaker 2

That's a good point. I would say that The strength of multifamily has certainly been a factor for us. I predicted incorrectly probably 4 years ago that multifamily would slow And it's still it's just stayed strong. The demand is there for rental housing. So it's Still got a strong place in the again, the outlook there looks good.

Speaker 2

With respect to how easy is it to switch production over, At the risk of like irritating most of our production facilities, I'm not going to say it's easy, But they do a really, really good job of managing that transition and changeover. The real challenge comes When customers need to delay starts or change starts and that's where it gets even more challenging at the production level because We have to move things around and shift schedules, but they've done a really, really good job at our facilities of managing those and layering them in. And So I give them a ton of credit for that.

Speaker 6

And could you speak maybe a little more to the competitive pressures you guys saw in the packaging? And then I guess, there's another thing. It looks like the PMIs are going to start or in the bottoming process, may be actually even improving by the end of the year. Do you think you'll end up seeing that? Will it be a lag before that starts to benefit some of the packaging businesses?

Speaker 6

Or should it be kind of more in line with how those PMIs track?

Speaker 2

Yes, there's a couple of different things going on there Stanley, which make it more difficult to be But I will tell you, I think your points dead on, it'll probably be a slight lag there. I think there's Been a program that they've had in packaging for a while, which is basically trying to convert from sticks and panels to value added products And maybe not take certain orders if they're not at certain levels. I know there's been more quoting activity A number of areas, which is typical in this environment. And so I think we've been doing very well with respect to the results of those types things, but that's created some of that competitive pressure I talked about. I think on the pallet side, typically The presence of a lot of excess cores on the market certainly can dampen pricing for a while until those are absorbed.

Speaker 2

But I think the PMI index coming back that certainly shows a good sign for the future. And I think The takeaway that I have for the Packaging Group is they've done a nice job of managing their overall margins and business mix In spite of the fact that the sales volumes are down.

Speaker 6

Yes. And then lastly, any thoughts on the cadence of the repurchase activity? The additional $200,000,000 is only for this year. How should we think about that?

Speaker 2

It's really for the next 12 month period. And so we'll continue to do what we've tried to do in the past. We want to make sure that the valuations are right. We want to allocate capital to where the highest Return is and certainly there's times within the second quarter you saw that where the value of our stock far exceeded anything else we could Invest in. So to the extent those opportunities are there, we wanted to have the approval of the Board to be able to go ahead and repurchase.

Speaker 6

Perfect guys. That's it for me. Thanks so much and best of luck.

Speaker 2

Thank you. Thanks Dan.

Operator

Thank you. One moment for our next question. That will come from the line of Ketan Mamtora with BMO Capital Markets. Your line is open.

Speaker 4

Thank you and good afternoon, Matt, Mike. Thanks for taking my question. First question, I was just curious, Mike, you talked about your big box sales were up kind of high single digits. On the independent retailer side, it was kind of down Mid teens, as I which is kind of more skewed to NewRezi, as you said. As I think about on a go forward basis with What we are sharing on NewRezi getting better.

Speaker 4

Are you seeing any signs that that sort of trend or year over year comps are changing as you move through the back half given that new resi is at least seems to be holding up better and there are some positive indicators?

Speaker 3

From a year over year standpoint, we're still looking at The Meehan being strong within retail, which is what you're talking about. I think I would make sure to point out though that Yes, we do have a pretty significant seasonal change that occurs from Q2 to Q3 and Q4. So that I would expect to kind of revert back Some more normal historical patterns, so with respect to seasonality. But year over year, we still feel like demand is in good shape and Some of that may be due to higher lumber prices over the last couple of years and people deferring projects. And so I think that and some other factors are contributing to repair remodel activity that's been better than we expected.

Speaker 4

Got you. Okay. And then as I think about capital allocation, obviously, balance sheet is in very strong shape. You talked about share repurchases. I'm curious as you think about M and A, kind of where are you seeing kind of most Interesting opportunities has kind of how is the seller expectations kind of moderated?

Speaker 4

And as you think about the Three segments has a relative attractiveness of 1 over the other kind of increased whether cyclical factors or anything else?

Speaker 2

Yes. I guess what I would say, Ketan, is I think packaging has been the area where we've had the most focus and the most opportunities that's Obviously, a highly fragmented marketplace. So for us that would be a much easier A combination that works through and there's more opportunities in that space. In the other segments, I think we're very selective in what we're looking at And they have to be able to drive synergies and scale in some form or fashion for us or create a new product idea, new product innovation that we So I think you're right on the capital. We talked a little bit about the valuations and I think right now people are still not quite where they need to be in terms of what I think real values are going forward.

Speaker 2

That's they're waiting for Somebody come in and pay them what they might have been worth a year and a half ago or 2 years ago. So I think there's a little ways to go there, but we are Very confident that there will be some opportunities in our wheelhouse and add values that fit our model.

Speaker 4

Got you. And one final question, Mike, any rethink or update for us in terms of how you think about decremental margins in your segments based on kind of what you're seeing so far?

Speaker 3

Yes. It's a good question. We have and we're taking a fresh look at that guidance that we Provided in the forward outlook of our 10 ks and 10 Q last quarter. And so that will be updated next week when we file. But I would tell you and it wouldn't surprise you that it will likely lower the construction of that rental margin given the performance and how we see the back half The year materializing.

Speaker 3

I'm going to guess that packaging is that range might change, but it's probably closer to that original range And probably expect to do a little better on the decremental margin, therefore, overall, retail is pretty much doing exactly what we thought We do. We're finally up compared to last year on profits and I think we'll build on that in the back half of the year.

Speaker 4

Got you. That's very helpful. I'll turn it over. Good luck in the back half.

Speaker 2

Thank you. Thanks, Keeney.

Operator

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.

Speaker 2

Well, thank you again for spending time with us today. While there are many challenges and unknowns we face, our experienced team gives me confidence to paraphrase the words of OneRepublic. I'm not worried about it right now because we'll keep the dreams alive. Thank you for your investment in us and we'll keep working to ensure great long term returns. Have a great day.

Operator

Thank you all for participating. This concludes today's program. You may disconnect

Powered by Quartr
Earnings Conference Call
Ryerson Q2 2023
00:00 / 00:00