Yahoo Finance UFP Industries, Inc. (NASDAQ:UFPI) Q4 2023 Earnings Call Transcript
UFP Industries, Inc. (NASDAQ:UFPI) Q4 2023 Earnings Call Transcript February 20, 2024
UFP Industries, Inc. misses on earnings expectations. Reported EPS is $1.62 EPS, expectations were $1.68. UFP Industries, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Q4 2023 UFP Industries Inc. Earnings Conference Call and Webcast. After the speaker presentation, there will be a question-and-answer session. [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 Investor Relations. The floor is yours, sir.
Dick Gauthier: Welcome to the fourth quarter 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 webcast at ufpi.com. 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.
Matt Missad : Thank you, Dick, and good morning, everyone. Thank you for joining our fourth quarter and year-end 2023 earnings call. Like George Costanza, we stopped short of our goal for the year, but thanks to the efforts of our team, we posted the third best sales and profit year in our 69-year history. As we have described before, the best way to analyze our performance without the abnormal lumber market, supply constraints and outsized demand from Q3 of 2020 through 2022 is to go back to 2019 and measure our progress. For 2019, we reported sales of $4.4 billion, and EBITDA of $317.3 million, or a 7.2% EBITDA margin. We just completed 2023 with sales of $7.2 billion, and EBITDA of $810 million, and an 11.2% EBITDA margin.
We began our new structure in 2020, and if we had predicted then that we would improve EBITDA by 255%, EBITDA margins by 156%, and that we grow sales by 164% in four years, we would have said those were lofty goals, but that's exactly what our team achieved. Like the Detroit Lions, who performed well, but we're disappointed at the end. We had a good year, and we know there are better years ahead. Our forecast for 2024 are based on data which is inconsistent and not well aligned, which makes forecasting difficult. Nonetheless, our view for the year is as follows. We plan on a relatively flat demand environment overall with an expected range of aggregate unit sales from slightly down to slightly up. We plan for new home construction to be slightly up to slightly down in 2024.
The overall market mix between single family and multifamily is expected to be approximately two third single family. January 2024 housing starts were an annualized $1.33 million and below expectations, with weather being a commonly cited factor. We saw repair and remodel trend down over the fourth quarter of 2023, but it is expected to be up slightly to down slightly in 2024. In January 2024, we saw a decline in units from expected, with weather again cited as a factor. The Purchasing Managers Index trended down during Q4 of 2023, and is expected to be down from 1% to 3% in 2024. January 2024, however, saw an uptick in the index, bringing it closer to neutral. Interest rates are projected to move down in 2024, and the current expectation is three rate cuts at some point during the year.
The federal deficit is expected to be $1.6 trillion in 2024, which will likely have an impact on capital markets. We can only acknowledge these economic forecasts and incorporate them into our plans and budgets for the next five years. While we are mindful of these macro factors, our focus remains on areas we can control. Regardless of market conditions, our attitude is to keep moving forward, to keep succeeding despite factors out of our control. Our goal in 2024 is to take the lessons from prior years, and as expressed in our internal theme, make it better. We had underperforming operations in 2023 that will improve or be exited. We have opportunities to reduce costs or improve efficiencies in each area of our business. From purchasing and manufacturing to sales, marketing, transportation, we will pursue actions that drive better bottom line performance.
As always, our goal is to create a stronger, more resilient company and build a strong team, which can excel for many years to come. Providing long-term shareholder value is a requirement, and our teammates who are also shareholders are completely aligned in the mission. Of course, growth is central to our strategy. Whether through M&A or organic growth, we will aggressively pursue our runways. Acquisitions remain a key component, and we had several acquisition opportunities during 2023. Our international group completed an acquisition in Spain, but we were unable to close others, primarily due to valuation challenges based on the target's hockey stick view of anticipated future performance versus our more muted and realistic view. On the organic growth side, we invested in several opportunities in 2023, and have several new projects planned for 2024 in new targeted geographic markets.
The strong operations performance over the last three years has allowed us to build capital for growth. And if we are unable to acquire reasonably priced acquisition targets in line with our model, we will grow organically. Return on investment is the key to this decision. For example, our request for capital from our business units for 2024 totaled well over $350 million, which includes automation, technology, marketing, and new product capacity as well as investments in markets where we have been unable to acquire targets at a fair ROI. We will stay operationally aggressive and fiscally conservative using our balance sheet to support our growth and value creation. Now let's review segment performance and outlook. We'll start with UFP Retail Solutions.
As a value-added manufacturer, seller and self-distributor, our products provide solutions for the DIY consumer as well as professional contractor. Our President of Retail Solutions, Will Schwartz, has worked well with his team to build on the success of the segment and outperform 2022 results. This is our largest segment by sales volume, and it has significant opportunities for creating synergies and scaling new and existing products. Our Deckorators product line continues to gain recognition and trust in the marketplace. We are investing to grow capacity and to add additional manufacturing in the Northeast. In addition to expanded marketing efforts, Deckorators has sub-branded its mineral-based composite product offerings as Surestone to highlight the unique advantages of the patented technology.
Expect some exciting new marketing efforts behind this technology and product line. Recently added plus planned future capacity in Surestone manufacturing will allow us to launch additional products to. The Surestone technology is quickly becoming a favorite among installers and homeowners for its aesthetics, durability and sustainability. The number of Deckorators certified professional installers has grown to over 900, and they continue to be great advocates for the products. While we grow our Surestone technology, we also expect some consolidation in the wood plastic composite space. Moving to ProWood and Sunbelt those units are creating more synergies with treating efficiencies and preservative utilization and development. Our ProWood FR fire retardant treated lumber sales continue to grow.
The PFS chemical development company is moving into our innovation group to drive more external sales as well as to accelerate the development of new formulations to preserve, protect and strengthen wood products. UFP Edge siding, pattern and trim products struggled in 2023, as demand waned for the category overall and as we continue to transition to more value-added products from basic commodity-type products. We have restructured management of this business unit and expect substantially better performance in 2024 and beyond. We also believe there are opportunities to deploy our Surestone technology in this product category. Our e-commerce platform continues to grow and serve our customers with direct fulfillment of many of our manufactured items.
We recorded online sales of more than $400 million in 2024, and we'll continue to grow out this capacity. Our Retail Solutions strategy is simple, provide innovative new products and solutions; find, expand and harness opportunities; select and build the right brands; and to utilize our national reach, purchasing expertise and distribution network to provide the best customer value. The outlook for retail in 2024 ranges from up slightly to down slightly for the year. A rebound is expected in 2025 and 2026. The big box retailers expect to gain market share as they focus more on small professional contractors. In January, our Retail Solutions performance was down versus a year ago due in part to tougher weather conditions in many parts of the country.
Moving on to the Construction segment, led by Patrick Benton, the site-built business unit remained resilient, with a good mix of single-family and multifamily projects. While starts in 2024 are projected to be slightly up to slightly down from the $1.413 million actual starts in 2023, there is optimism for rate cuts later this year and a rebound in '25 and '26. Our balanced approach serving multifamily as well as single-family helps position us well in the markets we serve, which tend to be the more resilient markets in the country and that continue to benefit from in-migration. We are well positioned to meet anticipated market needs, and we'll continue to adjust to the actual market conditions going forward. We also note that the build to rent market is growing and when multifamily units are included, over 40% of all new construction is in rental units.
We expect that higher interest rates, coupled with the forecasted decline in rates in six to nine months may cause some multifamily developers to wait until later in the year to begin construction on their new projects. Moving to Factory Built. The business unit is expecting a trend line similar to Site Build. We remain bullish on Factory Built housing over the long term as it remains the most affordable housing option. Recreational vehicles have been very slow, but have worked through inventory in their dealer network and are expecting to see a modest upswing later this year. While our view is a small portion of our business, we have several products in our recreate or recreate pipeline to help us gain share and grow within the market as industry recovers.
We saw considerable improvement in Commercial Construction in 2023, and we are forecasting a better bottom line result in 2024. This group has continued to balance manufacturing capacity and has consolidated manufacturing into four main locations domestically and one overseas. And in the concrete forming space, we added new locations in 2023 to serve new markets that have stronger growth prospects or to expand our capabilities in existing markets. The results were impacted by the ramp-up of these new operations. But in 2024, we expect significant improvement in bottom line results, more growth towards value-added products and less focus on distribution of sticks and panels. Overall, our expectation for construction in 2024 is slightly up to slightly down.
January housing starts were lower than forecast so a back half of the year catch-up will be important to hitting our annual target. In the Packaging segment, led by Scott Worthington, we have seen the biggest headwinds. Many of our customers have seen lower market demand, which means less demand for packaging. These customers are also evaluating costs in all areas and looking for concessions as the economy is more difficult. While we believe our value proposition is strong, we are not immune to these challenges and continue to seek less expensive yet still value-added solutions for our customers. The Packaging team is evaluating its internal costs as well and consolidating production in certain hubs, eliminating excess capacity, and focusing on manufacturing efficiencies with a lower level of overall production.
Longer term, we have a diverse end-customer markets to pursue, including appliances, light and heavy equipment, agriculture, moving and storage, automotive, furnishings, horticulture and glass. The Packaging industry remains very fragmented, and our modest market share leaves tremendous opportunity for growth. Increasing our design, engineering, testing and analytical capabilities has helped create more opportunities to bring solutions to customers who value that level of expertise and creativity. Our new steel packaging facility has added excellent alternatives for packaging heavy items and reusable applications. And we continue to expand our mixed material offerings and specialty products, such as Strip Pak, to new geographies, both domestically and internationally.
PalletOne saw a decline in volume in 2023. As large pallet pool operators right size their inventories, they are relying more on used pallets. However, we expect to return to a more normalized environment later this year. As a result, the second half of 2024 is projected to be stronger than the first half. This business unit is expanding its national footprint and is poised for strong growth in 2025 and 2026. While there will be economic challenges, the long-term outlook for UFP Packaging remains strong. We will continue to invest in automation, innovation and acquisition to advance our goal of becoming a global packaging solutions provider. And we will be combining our research, development and state-of-the-art testing capabilities into a central location in 2024.
Overall, we expect unit sales to be down slightly in 2024 and to rebound in 2025 and 2026. On the international front, our team is focused heavily on extending our packaging solutions to multinational customers. The corrugated capabilities in India and Australia, our Strip Pak branded products in Asia and other markets, and pallets and structural packaging in Mexico, Europe and elsewhere, enhance our total product offerings. Our international sourcing and sales efforts create worldwide capabilities for both our domestic and foreign customers, which we will be enhancing with new technology, much like the timber-based product that was launched earlier this year. Clearly, the overall economic outlook is mixed. While it certainly does inspire unbridled optimism, like the Odysseus landers rocket ride to the moon, we aren't discouraged.
We've been here before, and there's no team better prepared to create success. We can hear Jeff Lynn singing, Don't Bring Me Down, and we might add a twist, you can't bring me down. Some other items of interest in our focus areas and departments are, first of all, new products. New product sales for the fourth quarter were $142 million, and for the year, were $716 million. Both numbers were below our targets for the year due in part to lower lumber market prices. For 2024, we have raised the bar on the definition of new products as we drive focus on more value-added products and services. For new products, we have increased the return on investment target. We've placed more emphasis on innovation and eliminated many products that were new to UFP, but do not have a competitive or sustainable advantage.
With the higher standard, we are lowering the forecast for new product sales to $510 million for 2024. We will still be marketing and selling the products which no longer qualify as new, and estimate those items could sell up to $300 million in 2024. Our investments in the innovation accelerator assist speed to market for new product ideas by rapid iteration and faster scale and synergy. We have seen several new products developed in 2023 and tested, which we expect we will bring to market during 2024. Our Innov8 Fund has completed 4 investments in either late-stage development or early-stage commercialization projects. The team has several other opportunities in the pipeline as we fulfill our 2021 commitment of $100 million of investments for these types of projects over the next few years.
Purchasing. In 2024, the lumber market is expected to remain within the trading range, more in line with historical levels. The mills are bringing on additional capacity of more than 1 billion board feet in 2024. We expect that mills will manage the supply side by taking production offline at less efficient mills to match market demand or their margins. We note that in January, the lumber market has declined steadily. Transportation. During 2023, we invested in improved technology, and work to centralize our transportation functions to gain efficiency and reduce our overall costs. As with most major changes, the rollout of technology has come with some challenges, which are being addressed, and we have also uncovered areas, which will be improved by our new model.
We expect to have the core systems fully implemented in 2024. On the human capital front, we note that the current U-6 unemployment rate at the end of January was 8%, up from 7% at the end of December 2023. We note that many of the jobs being created are in non-profit health care and government. These factors help explain the current lack of growth in the manufacturing space. Our facilities are consistently evaluating staffing levels and production schedules to optimize our teams. We also balance our workforce among segments to ensure easy transfers from areas seeking a slowdown to those that remain strong. We make sure that we keep our strong performers on our team while deemphasizing the need for temporary workers. We also continue to train, recruit and hire to keep growing our skills and talent.
We have a long history of promoting from within, and we augment this practice by hiring outside expertise and talent to help us improve. The UFP Business School continues to add unique opportunities for current and prospective employees to enhance their skills and knowledge and move up in the organization. And in our quest to be the employer of choice in the communities we serve, we are honored to share bonuses and extra compensation with our hourly employees. These bonuses totaled over $53 million in 2023 as we continue to share performance rewards with all of our full-time teammates. In the marketing space, as we continue to grow our value-added product categories, we recognize the need to refine, enhance and measure the effectiveness and efficiency of marketing spend to ensure that we are driving sales in the most efficient manner possible.
We are creating a small central marketing team to provide a more robust process to provide data-driven and timely results to our leadership teams and to better leverage costs with the marketing teams and our business units and segments. We have developed a five-year strategic plan, which sets targets for sales of over $10 billion, not including material acquisitions. It also charts a path to higher EBITDA margins, with a stretch goal of 12.5% EBITDA margin. Now I'd like to turn it over to Mike Cole to review the financial information.
Mike Cole : Thank you, Matt. Our consolidated results this quarter include a 20% drop in sales to $1.5 billion consisting of a 10% reduction in selling prices and a 10% decrease in units sold. The decline in selling prices, as a result of the drop in lumber -- is a result of the drop in lumber and more competitive pricing in certain business units. The biggest factor impacting our drop in unit sales is our calendar. It's important to note that in the fourth quarter of 2022, we operate with one extra week of activity due to the way our fiscal year-end works. One less week resulted in a 6% unit decline in the fourth quarter of 2023. Next, while adjusted EBITDA dropped 22% to $166 million, adjusted EBITDA margin remained well above historical levels at 10.9%.
We believe our team's commitment to grow our portfolio of value-added products and our market-focused management structure continued to contribute to the structural improvement in our margins. Return on invested capital finished the year at almost 24%, more than two times our weighted average cost of capital. Operating cash flow improved by $128 million to $960 million for the year as lower volumes and lumber prices reduced our investment in net working capital. And finally, our balance sheet continues to gain strength, with a net cash surplus of $842 million this year compared to $281 million last year, providing us with flexibility to pursue financial and strategic objectives. Moving on to our segments. Sales in our Retail segment dropped 27% to $506 million, consisting of a 9% decline in selling prices and an 18% decline in unit sales.
This unit decline was comprised of a 14% decline in volume with big box customers, and a 23% decline in volume with independent retailers. We experienced our greatest unit declines in our Edge business unit, which Matt discussed, and the Outdoor Essentials and Building Products categories of our ProWood business unit. Despite of lower demand and sales volumes, we're pleased to report a $2 million increase in our gross profit for the quarter, which was driven by our ProWood and Deckorators units as a result of pricing and operational improvements. Higher SG&A expenses contributed to a $4 million decrease in Retail's operating profits for the quarter. The increase in SG&A was primarily comprised of an increase in incentive compensation expenses.
Moving on to Packaging. Sales in this segment dropped 21% to $414 million, consisting of a 10% decline in selling prices and an 11% decrease in units. As we mentioned last quarter, customer demand continues to be soft, and that's contributed to more competitive pricing. As a result of these factors, gross profits dropped by almost $49 million. The decline in gross profit was offset by a $10 million decrease in SG&A due to a decline in incentive compensation expenses. Operating profits in the Packaging segment declined more than $38 million to $43 million in total. Turning to Construction. Sales in this segment dropped 16% to $511 million, consisting of a 13% decline in selling prices and a 3% decrease in units. The unit decline was primarily due to our commercial and concrete forming business units.
The decline in selling prices was primarily experienced in our Site Built and Concrete Forming business units, and resulted in an $18 million decrease in our overall gross profits and operating profits in the segment for the quarter. As we manage through this cycle, each segment continues to focus on executing our strategies to grow our portfolio of value-added products. And we're pleased to report an improvement in our annual ratio of value-added sales to total sales to 68% this year from 63% last year. Similarly, our annual ratio of new product sales to total sales improved to 9.7% this year from 7.7% last year. We're confident these factors will not only help us maintain the structural improvements in margins we've realized today, but enable further improvements on our EBITDA margins overtime.
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 resources needed to execute long-term strategies that enhance our ability to offer value-added solutions and drive innovation. Our SG&A expenses came in unplanned for the quarter, and were $17 million lower than last year, driven primarily by lower bonus and sales incentives for the quarter. Lower incentive expenses were also the primary reason SG&A expenses dropped $67 million for the year. Before we move on to the income statement, we think it's important to assess the impact of our strategies and structure on our overall profitability by looking at our performance in 2019 compared to 2023. The metrics we focused on are gross profit margin, SG&A as a percentage of gross profit, adjusted EBITDA margin and adjusted EBITDA growth to unit sales growth.
Gross profit margin improved from 15.5% in 2019 to 19.7% in 2023. SG&A as a percentage of gross profit improved from 64% to 54% in 2023. Adjusted EBITDA margin improved from 7.2% to 11.2%. And our adjusted EBITDA growth was 4.5 times greater than our unit sales growth since 2019. This track record gives us confidence our strategies are working and that continued execution of them will help us reach the long-term goals we highlighted in the press release, and that I'll touch on at the end of my prepared remarks. Moving on to our cash flow statement. Our cash flow from operations was $960 million, a $928 million improvement over last year as lower volumes in lumber prices reduced our investment in net working capital. Our cash cycle for the year decreased to 63 days this year from 64 days last year due to an improvement in our receivable cycle, and our receivables remain healthy at 91% current.
Our investing activities included $180 million in capital expenditures. Our expansionary investments, which totaled about $70 million, are primarily focused on four key areas: expanding our capacity to manufacture new and value-added products, primarily in our structural packaging, protective packaging and Deckorators business units; geographic expansion in core higher-margin businesses; achieving efficiencies through automation and increasing our transportation capacity. We also spent $52 million to acquire Palets Suller, a leading manufacturer of machine-built pallets in Spain that gives us an active runway for growth geographically and in new verticals they don't currently serve. Finally, our financing activities included returning capital to our shareholders through almost $68 million of dividends and more than $82 million of share repurchases.
Turning to our capital structure and resources. We continue to have a strong balance sheet, with $842 million in surplus cash in excess of debt compared to $281 million last year. Our total liquidity was $2.4 billion, which includes cash of $1.1 billion and $1.3 billion in availability under certain long-term lending agreements we have in place. 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. We plan to continue to pursue a balanced and return-driven approach between dividends, share buybacks, capital investments and M&A, specifically.
Our board approved a quarterly dividend of $0.33 a share to be paid in March, which represents a 10% increase from the most recent quarterly rate, and a 32% increase from the rate paid last March. We currently plan to continue to increase our dividend rate -- annually at a rate that is aligned with our targeted long-term growth rate in earnings and cash flow. The share repurchase program our board approved in July provides us with authorization to repurchase up to 200 million worth of shares until the end of July 2024. Since the approval, we've repurchased more than 274,000 shares at an average price of $97.22, resulting in 173 million in remaining authorization. As a result of the growth and margin improvement opportunities we see, we plan to increase our total capital expenditures to an estimated range of $250 million to $300 million in 2024.
Expansionary capital investments are expected to comprise $150 million to $200 million of this total. We plan to continue to invest at this elevated level in the future to capitalize on the higher margin growth opportunities we see in each of our segments. Finally, our strong balance sheet continues to allow us to continue to pursue a pipeline of M&A opportunities. We'll continue to target companies that are a strong, strategic fit and enhance our capabilities and competitive position while providing higher margin return and growth potential. I'll finish up with comments about our outlook for the year and our long-term goals. Looking into 2024, we believe the soft demand and more competitive pricing we're currently experiencing will continue into the first half of the year.
But we're optimistic, we'll see improvements in the back half of the year based on the current economic forecast, including the trajectory of interest rates. On a long-term basis, we'll continue to focus on executing our strategies to take advantage of the opportunities identified in our business units. Generally, those opportunities consist of growing our portfolio of sales of new and value-added products and investing in our brands, expanding geographically in our higher-margin core businesses, investing in automation and process improvements to expand capacity and enhance productivity, vertically integrating in certain businesses, and gaining market share with large customers through more strategic sales efforts and our unique capabilities and geographic footprint.
As we effectively execute our strategies, we believe we can achieve our new five-year financial goals of a 7% to 10% compounded annual growth rate in unit sales, a 12.5% adjusted EBITDA margin, and a return on invested capital exceeding our hurdle rate on new investments while maintaining a conservative capital structure. That's all I have in the financials, Matt.
Matt Missad : Thank you, Mike. Now I'd like to open it up for any questions that you may have.
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