UFP Industries, Inc.

and thank you for standing by. Welcome to the UFPs Industries Inc. Q2 2022 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Dick Gossier, Vice President of Communications and Investor Relations. Please go ahead, sir.

Welcome to the second quarter 2022 conference call for UFP Industries. Holding the call today are CEO Matt Massad 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. A replay will also be available at that website. Before I turn the call over to Matt Massad, 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 the filings with the Securities and Exchange Commission. Now I would like to turn the call over to Matt Massas.

Thank you, Dick. It's a beautiful day at USP, and we are keeping the sunny side up. Many pundits are turning the music off, but our team says, don't stop the party. The team has been working day and night to post more incredible results and continues to turn on the record machine with new sales and profit records for the quarter. Net sales for Q2 were 2.9 billion, with units up a modest 3%. Net earnings were $203 million for the quarter and diluted EPS was $3.23 a share. These results were delivered in a rapidly falling lumber market, which in the past would have impacted overall performance much more negatively. Instead, these results demonstrate the resilience of our diversified business model, as well as the skill, experience, and dedication of our teammates in the UFP family of companies. I want to thank them all for this spectacular performance and congratulate them on their achievements. At the same time, some of you are telling us, don't look back, just tell us about the future. I'll cue up that song in a bit, but first let's review the performance and outlook by segment. We'll start with construction. The site-built business unit has strong order files through the balance of 22 in most of the markets we supply components. The Northeast market has softened somewhat due in part to out migration from that state. The site-built group benefited in Q2 from market tailwinds which resulted from strong demand and lack of available supply. Looking ahead, multifamily orders are still strong in the markets we serve as owners and developers are bullish on the outlook for the balance of 22 and 23 and are taking advantage of the softened market pricing for materials. Our forward outlook in SiteBuilt is based in part on the latest predictions of actions by the Federal Reserve, which show increasing rates through Q1 of 2023 and, surprisingly enough, rate declines in Q3 or Q4 of 2023. While we favor a patient wait-and-see approach for three to six months after each rate change to allow the impact of the moves to be absorbed, the current dialogue does not exhibit patience or acumen. As a result, we expect single-digit percentage declines in housing starts over the next two years. With our business model and our geographic locations, which tend to be in areas where long-term growth is expected, this level of activity will still result in very good performance in our site-built business. Factory-built is strong, and the affordability that factory-built homes provide makes it an attractive option in a rising interest rate and inflationary environment. People still need homes, and mobile and modular are great entry-level options as well as move-up options. RV has seen a significant slowdown, although it is not a large percentage of our factory-built business. Factory-built did suffer some margin erosion in Q2 as certain variable-priced items declined during the quarter. The outlook remains positive, though, as manufacturers look to expand production of lower-priced units. In the concrete forming area, we continue to expand our geographic presence and move to convert sticks and panel sales to designed, manufactured, and assembled form sales. Variable price products saw margin compression in the concrete forming market as well during the quarter and should normalize during Q3. And we have not yet seen any significant activity from infrastructure spending Commercial construction has worked very hard to improve, and they are heading on a good path towards our overall return targets. While there still remain some supply issues domestically with highly custom products, the supply chain for imports from Asia has improved from earlier this year. They have additional opportunities for improvement, too, as they rationalize product mix and ensure that they receive the appropriate value for the services they provide. They plan to operate at functional capacity during Q3 to meet their customer orders. Moving to retail solutions, our retail customers continue to see solid demand after a slow start to the spring in the northern markets. Year-over-year comparables were generally better in June as the professional contractors remain busy. The decorators' business units have seen lead times for wood plastic composite return to normal pre-pandemic levels and inventories throughout the channel are back to normal levels as well. We are operating the wood plastic composite operations at approximately 70 to 75 percent of capacity, which in total still is above the 2019 levels. On the other hand, we continue to experience lengthy lead times and unmet demand for our mineral-based composite products, such as Decorators Voyage. We increased our capacity by approximately 66 percent on an annualized basis compared to last year, and are still operating at a full capacity today. We expect to complete our equipment installations and ramp up for our goal of 100% capacity increase over 2020 by year-end 2022. And we continue to see buyers moving away from traditional higher-end wood products, primarily cedar and redwood, and making the jump into our mineral-based composites. Our certified professional installers continue to be our best brand advocates as they have become a primary driver of increased demand that we continue to see here. And we are also excited to see the continued growth and the impact from our ultra-aluminum and cedar poly acquisitions earlier this year. In outdoor essentials, the customer inventories have normalized seasonally after being higher than needed in most of Q2 due to customers' concerns of freight and supply chain issues. Our Haven line of lawn and garden products is gaining momentum, too, and will be followed by several other new products as we expand our tool-free offering. We have had to increase prices in this market to reflect the higher input costs, and have been working with our customers to better communicate our value proposition to the consumers. In the handprint business unit, our craft stores and mass merchandise customers dramatically slowed their orders in Q2. Some customers are down as much as 80% due to excess inventory in the channel. Most of the large craft customers have a 60-day lead time, so we have started to see order volume improvement. In ProWood, lead times have also decreased as demand for our products has normalized to pre-pandemic levels, and supply has been able to catch up. We faced a falling lumber market the majority of the quarter with inventory needed for the traditional seasonal buildup. Our fire retardant product, ProWood FR, continues to expand distribution and is picking up share in the market. We expect a lower price level for the consumer and a solid backlog of outdoor projects will favor ProWood performance compared to Q3 2021. Situation is similar at Sunbelt. The rapid decline in the market, while similar in scope to 2021, did not impact Sunbelt as badly as a year ago. Nevertheless, Sunbelt had approximately $9 million of lower cost for market adjustments in Q2. The continued improvement of their purchasing programs as well as a more dynamic pricing model will improve bottom line performance. It also may be necessary to eliminate business which does not meet our return targets as we try to improve our overall performance. The industrial segment continues to perform well. as Pallet 1 executes its strategy to improve sourcing, manufacturing, and is expanding geographically within the UFP footprint. The recent combination with Dempsey Forest products provides additional opportunity to create efficiencies in the supply chain. In structural packaging, our national sales team continues to gain business and drive more sales with national accounts. We also continue to convert more commodity business to value-added, including design, engineered, and mixed materials manufacturing. Enhancing our proprietary strip pack product is a good example of unique solutions that we provide for our customers. Our agriculture business is also gaining share as the cost of alternative petroleum-based products increases. Looking ahead, some customers' businesses have slowed somewhat while others remain strong. We are gaining customers as well as gaining efficiencies in manufacturing. The supply chain overall is improving, which helps reduce lead times. But our outlook remains positive given our very diverse end markets in the industrial space, which provide great stability. In UFP packaging, we have also seen a slight weakening in demand as these end markets generally mirror our overall customer mix in industrial. We still see strong growth opportunities in this business unit, and will continue our search to grow new products and opportunities. In the international group, our operations in Australia and India are improving nicely coming out of the pandemic. Mexico has continued to perform well with the parts of the business tied to housing related products facing similar challenges going forward. Europe and the Middle East performance are lagging and not up to our standards. On the sourcing side, our international team continues to battle shipping costs while finding valuable resources in other parts of the world. As we look at purchasing and transportation, we expect a more stable and normal lumber and panel market in the back half of 2022. Our internal transportation costs have increased due to fuel and labor cost increases, and third-party trucking availability is improving, but potential rate decreases are being offset by higher fuel prices. We expect trucking availability to remain good, but we also do not expect significant rate reductions. As we look at our inventories overall, they are higher than we would like, and we will be reducing them during the back half of the year as supply and transportation concerns are expected to be alleviated. However, rail has been and will likely continue to be a concern through the third quarter and through year end. Labor and equipment shortages have plagued the carriers which have created pressure for users like UFP and have caused us to pay higher freight costs by using trucks rather than rail cars. On new products, the new product sales for the quarter were 180.1 million and are 347.7 million year to date. In our continuing effort to innovate, we are seeing new products come through the innovation accelerator and we are exploring intellectual property, technology, and process improvement acquisitions and ventures through our new innovation fund, which is designed to get new products at an earlier stage of development and enable faster commercialization and scaling. Because of our commitment to continue to find better products and processes and ensure a stronger piece of the value chain, we have to continue to develop intellectual property and disrupt our businesses before others do. As a result, we expect to invest up to $100 million over the next several years to find more new and unique products and develop a long-term robust pipeline, which will deliver results over a three to seven year period from the time of investment. Labor has and continues to be an issue for our industry. In some markets, it remains very tight, while in others, it has loosened somewhat. However, with more reasonable takeaway, we have generally been able to manage this better internally than in previous quarters. Wages and benefits have increased significantly, and we intend to continue our fall and spring bonus programs for our hourly teammates. Regardless of the hurdles we face over the next few years, we will face them head on and keep our focus on protecting and enhancing long-term shareholder value. Effective allocation of capital is a cornerstone. We prioritize capital on growth, creating long-term value and providing a solid return to our shareholders. Our growth capital is directed to strategic acquisitions, new products and services, expansionary and efficiency capital expenditures. We have plenty of acquisition targets in the pipeline, but we'll keep our disciplined approach and adjust our model consistent with our view of the future. We have a great supply of dry powder and a strong balance sheet, which enables us to take advantage of opportunistic situations as they occur in the targeted runways. In addition to new products and services in all business units, we see opportunities with our industrial growth as we pursue our goal of being the global packaging solution provider. We will continue to scale our recent acquisitions across our network, as well as finding new products in M&A throughout our business unit footprint. Our return on capital to shareholders takes three forms, share repurchases, cash dividends, and increase in share value. In addition to the share repurchases during the quarter, we believe that consistent and growing dividends adds value to our shareholders and are pleased to report that the Board again authorized a dividend of 25 cents per share payable on September 15 to shareholders of record on September 1st. And while the demand for capital is high throughout the organization, we will remain thoughtful in our approach and stay true to our return on investment focus. Now we'll turn it over to Mike Cole to share more information.

Thanks, Matt, and good afternoon, everyone. Our consolidated results this quarter are highlighted by 3% unit sales growth, including 2% organic over record volumes last year, 22% adjusted EBITDA growth, EBITDA margin expansion of 130 basis points to 11%, a trailing 12-month return on invested capital of 29%, and a strong balance sheet with net debt to trailing 12-month EBITDA less than 0.2 times and liquidity over $1.1 billion. 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 decreased 11% and consisted of a 5% decrease in selling prices a 2% decrease due to the transfer of certain sales to our construction segment as we continue to align business optimally in our segments, an organic unit decline of 5%, and unit growth from acquisitions of 1%. The organic unit decline is experienced in nearly all of our retail business units as a result of a difficult year-over-year Q2 comparison with last year's strong results. As you may recall, orders were exceptionally strong in Q2 last year as customers stocked inventories anticipating strong consumer demand. When that level of demand didn't fully materialize, orders slowed significantly in Q3. This year, we've seen more steady order flow and register sales of our customers and are optimistic our unit sales comparisons next quarter will be more favorable. Cumulatively, since 2019, our retail unit sales have increased organically by 15%. Sales to the industrial segment increased 11%, which was driven by selling price increases as we continue to improve our value-added product mix, execute value-based selling initiatives, and maintain pricing discipline. Our unit sales from acquisitions increased 1%. Consistent with our discussion last quarter, organic unit growth was flat due to capacity constraints, including the availability of labor and long lead times on equipment, as we continue to be selective in the business we take in order to focus on higher margin value-added products. Strong execution of this sales strategy again resulted in tremendous improvement in our gross profits, which I'll review shortly. The components of our change in organic unit volumes includes market share gains associated with 17 million in sales to new customers, 24 million of sales to new locations of existing customers, and 20 million of new product sales, demonstrating the balance of our organic growth channels. These gains were offset by the intentional loss of unit sales on less profitable accounts. Customer demand is beginning to show signs of softening in the industry, that we've been able to mitigate through these market share gains. Finally, our sales to the construction segment increased 32 percent, consisting of a 15 percent increase in selling prices, 2 percent growth due to the transfer of business from retail, and 15 percent organic unit growth. Organic unit growth was driven by a 63 percent increase in commercial, a 35 percent increase in concrete forming, and 16 percent in factory-built housing. Capacity constraints in our site-built business unit have been a challenge, so we focused on being selective in the business we take to maximize profitability. Order files and backlogs of business remain elevated in our commercial, concrete-forming, and factory-built business units. Within site-built, demand in our Mid-Atlantic, Texas, and Colorado regions remain healthy, while the Northeast is beginning to show signs of softening to pre-pandemic levels. Multifamily demand in the regions we serve also remains strong. Moving down the income statement, our second quarter gross profits increased by 82 million, or 20%, and significantly outpaced our 3% increase in unit sales as our profit per unit improved. By segment, construction's gross profit increased by 93 million, or 69%, led by a $73 million increase in site build, an $11 million increase in factory build, and an $8 million increase in our commercial business unit. Value-added products have increased to 75 percent of total sales this year from 68 percent last year. Industrials' gross profit increased by 28 million, or 21 percent, primarily due to our value-added selling initiative and more favorable changes in product mix, including new products. Value-added products have increased to 71 percent of total industrial sales this year from 64 percent last year. retail decreased by $49 million, or 40% for the quarter. The decrease was primarily driven by our ProWood, Sunbelt, and Retail Building Products business units, totaling $47 million. The products sold in these business units are based on a variable price tied to the lumber market, which dropped from its 2022 peak of over $1,300 at the end of March to under $600 at the end of June. This also resulted and a lower of cost or net realizable value reserve that we recorded at the end of June, totaling $9 million. In July, prices have stabilized. You might recall that last year, lumber prices rose to over $1,500 by the end of May, dropped to approximately $1,100 by the end of June, and continued to fall to under $400 by the end of August. Given our current inventory positions and the timing of the lumber market declines, we believe we're well positioned to show a favorable improvement in our gross profits next quarter. Continuing to move down the income statement, our SG&A expenses, excluding bonus expense, increased by 30 million, including nearly 4 million from recently acquired businesses. The remaining increase primarily consisted of a $10 million increase in sales incentives, a $9 million increase in bad debt expense, a $6 million increase in wages and benefits, and a $3 million increase in travel costs. These increases were offset by a $6 million decrease in our accrued bonus expense for the quarter. The decrease in the current year is due to modifications made to reduce the size of the incentives earned under our bonus plan. The ultimate goal of our plan is to make sure our incentives appropriately reward our employees and are aligned with results that drive shareholder value. Modifications result in a lower bonus rate when higher levels of pre-bonus operating profits are achieved, while still rewarding growth and return on investment. We've made other changes as well to make sure bonuses continue to be more broadly allocated to a greater number of employees to foster the teamwork our culture encourages. These modifications resulted in a $17 million adjustment to our bonus expense, to reduce our bonus expense. Our year-to-date accrued bonus expense is now recorded at 17.5% of pre-bonus operating profit. Historically, under the old plan provisions, bonus expense was approximately 20% of pre-bonus operating profit. Sequentially, our SG&A decreased from $220 million in Q1 to nearly $215 million in Q2, primarily due to lower bonus expense offset by increases in bad debt expense and sales incentives. Finally, our operating profits increased nearly $49 million, driven by a $66 million increase in construction, a $15 million increase in industrial, and a $38 million decrease in retail. Acquisitions contributed $2.5 million to the increase in our operating profits. Moving on to our cash flow statement, our net cash flows from operations for the year to date was $90 million and consisted of net earnings and non-cash expenses of $475 million, compared to $328 million last year, and a $385 million increase in net working capital since the end of last year, compared to a $444 million increase in the prior year. Looking forward, we anticipate converting the $385 million increase in net working capital to cash during the back half of the year, assuming lumber prices remain at those normalized levels and our business follows a more normal seasonal pattern. We measure our cash cycle to assess our working capital management, and it increased to 51 days this year, which is consistent with our historical trends, but three days higher than last year, primarily due to an increase in our day's supply of inventory. Our investing activities for the year included capital expenditures totaling $72 million, including expansionary and efficiency capex of $35 million. Extended lead times on most equipment and rolling stock may cause us to fall short of our plan of $175 to $225 million of CapEx for 2022 as delivery of these items could get pushed to 2023. And we invested $39 million on previously announced acquisitions. Finally, our financing activities for the year included $28 million of dividends and $91 million of share repurchases. With respect to our capital structure and resources, At the end of June, our total net of cash was only $191 million compared to $1 billion in trailing 12-month EBITDA and $2.3 billion in equity. And our total liquidity was over $1.1 billion consisting of surplus cash of $138 million and availability of $536 million under our revolving credit facility and $500 million under a shelf agreement with certain lenders. I'll finish up with comments about our capital allocation plans. The strength of our cash flow generation and conservative capital structure provides us with plenty of capital to grow our business and also return to shareholders. We continue to pursue a balanced and return-driven approach across dividends, share buybacks, capital investments, and M&A. Specifically, our board just approved another quarterly dividend of 25 cents a share, representing a year-over-year increase of 67%, reflecting confidence in our future business outlook. We continue to consider our payout ratios and yield when determining the appropriate rate and are pleased to once again raise our year-over-year dividend. So far for the year, we've repurchased 1.2 million shares of our stock at an average price of $77. We have remaining authorization to repurchase up to an additional 1.4 million shares through the balance of the year and will continue to do so at times when the price hits our pre-established target. Moving on to growth. The low end of our targeted CapEx range of $175 million now appears more likely due to the extended lead times I mentioned earlier. Priority continues to be given to projects that enhance the working environments of our plants, take advantage of automation opportunities, and drive strategies that have long-term growth potential of new and value-added products. Notable projects include investments to expand the capacity of our decorators business unit, expand U of P edge geographically, enhance automation and expand the capacity of our machine-built pallet and other structural wood packaging operations, enhance automation and expand the capacity of our site-built operations, including geographically, and expand our transportation fleet to meet our customers' needs. Lastly, we continue to pursue a healthy pipeline of acquisition opportunities of companies that are a strong strategic fit and enhance our capabilities while providing higher margin, return, and growth potential. That's all I have on the financials, man.

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

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. Please stand by while we compile the Q&A roster. And our first question will come from Keaton Mamtora with BMO Capital Markets. Please go ahead.

Thank you. And congratulations on another strong quarter to the USP team. First question, starting with the retail segment, Matt, if I look at the Southern Yellow price, Yellow Pine price, you know, fell quite sharply in the second quarter, even on a year over year basis was down quite a bit. Yet your prices were down only 5% in this segment. Can you talk about what you guys are doing differently? Because in the past, you know, we would have seen it as sort of a closer correlation with what's happening on the lumber side?

Yeah, that's a good question, Keaton. I don't know that I can give you a ton of color on that specific pricing discipline or if there's something that specifically has changed. I know how we purchase lumber and how we manage our inventories has definitely improved over the period of time, but I think there's also a lag in the market and there are some other things that may be impacting that the percentage you're referring to.

I think it's a more difficult calculation to keep. And last year you had prices running for much to the quarter, dropping then in June. And this year, prices started out more elevated and then declined, obviously, through the quarter. So I think the timing of sales and the timing of the market movements is probably not giving you as clean a look at that as in the past. And the business does become a little less weighted toward lumber the more we accomplish growing the other value-added parts of our business and do more value-added just generally is more fixed pricing. So that's part of the reason why that disconnect is starting to occur.

Okay, that's helpful. So Matt or Mike, does it then mean that we will see more of an impact of this falling price in the third quarter? I know you talked about having positive year-over-year kind of performance in this segment. But when I think about Q3 versus Q2 at a high level, how would you have us think about that?

Well, I think what I would probably do, Keaton, is take a look at things, units like ProWood and Sunbelt, and I think the best way to look at it is year-over-year comparisons. We expect that given the similar demand profiles, Q3 should yield better results in 2022 than it did in 2021. That's probably the biggest area. The rest of the business units are maybe a little more disconnected, as Mike said, from the lumber market.

And Keaton, I guess maybe adding on to that, the lower cost of market write-down that we did this year, which was $9 million, that basically got our inventories where cost obviously was above market. They got it in line with market. And now prices have stabilized in July. And to the extent they stay there, that positions us really well to make a good margin on those sales going forward. Last year was the opposite. We lost $25 million in operating profit, I think, which is something I've never seen before. But that's what occurred last year because that drop in the market occurred in July and in August, and we were selling into a dead down market, you know, for two straight months. And so just very different dynamics. And, and we feel that positions us really well to show a gross profit improvement in retail in Q3, a pretty strong one.

Gotcha. So again, I'm not trying to put too fine a line on this, but if prices were to stay where they are, on the lumber side, and if the demand profile does not change too dramatically, would Q3 be better than Q2, or it's tough to say at this point?

Yes. Yes, because we took it for retail, which I assume is what your question related to. Yes, because the impact of selling into that down market throughout Q2 was painful. And you can see that in the change from Q1 to Q2.

Yes. Okay. Now, that's helpful. I'll jump back in the queue. Thank you.

Thanks, Keaton.

One moment for our next question. That will come from the line of Stanley Elliott with Stiefel.

Hey, guys. Thank you very much for taking the question. Matt, you guys have done a nice job of kind of mixing up the business and walking away from less profitable kind of business and being more selective. If we do see a marketing softening, generally speaking, is there enough runway for you all to continue that trend and being more selective so that the actual impact on the margins should be no negligible and maybe even see some further improvement?

Yeah, I guess what I would say, Stanley, is without knowing specifically what margins you're referring to, I think there still is a fair amount of runway for us to grow in our conversion from more commodity type sales to more value added sales. And so that will improve generally the overall value we provide and the margin should improve with it. I just would caution you from comparing overall margins versus specific product or specific Products that we're selling now at a low margin, they're in a blended rate in total. So it may not have the same corollary effect that you're talking about.

That sounds fair. Switch gears to the Cedar Poly Recycler. Is this all planned for internal use? Do you guys see this more as a margin play or more of a material availability? play? And kind of gets to follow on, we've heard nice things about decorators in the marketplace, and I'm assuming this is going to be sized so you can continue to grow with that product.

Yeah, I think as obviously at the time of acquisition, it was not fully dedicated to decorators. I think it is sized properly and we want to continue to grow it and create more opportunities there. It will definitely enhance and make our operations more efficient. Hopefully, we'll reduce our costs. And from a long-term perspective, we'd like it to be capable of handling all of the decorator's needs, but that's quite a ways down the path.

And then lastly, on the M&A environment with lumber prices kind of having settled out a little bit, you have some of the seller expectations kind of settled out as well. Is it still kind of a disconnect. Just curious kind of how aggressive you all were interested in being in the back half the year with the M&A environment.

Yeah, I'll just kind of give you the broad picture. I think Mike can chime in with a lot more detail than I have. We still want to make sure we're hitting our ROI targets when we look at transactions, and we try to use normalized numbers as opposed to what I'll call peak numbers of the past year or so. So with that in mind, we'll be diligent and dedicated and Hopefully we'll be able to put things together. The sellers that I've talked to still have high expectations, but maybe they're willing to come down from them. What are you seeing, Mike?

Yeah, I think the pipeline is probably a little slower than it's been in the past. In bidding proposals that we've been part of, maybe fewer bidders than what we've seen in the past, so a little less competitive. Even though the pipeline might be a little slower, we have lots of opportunities, though, because we have so many different business units that have great opportunities for them to grow in their runways. And like Matt said, we're being very careful on valuation just relative to what could be peak performance. So we are looking at normalized and multiples off those numbers.

Perfect, guys. Thanks for the time and best of luck. Thank you, Matt.

Thank you. One moment for our next question. That will come from the line of Curt Yinger with DA Davidson. Please go ahead.

Great. Thank you, and good afternoon, Mike. Hi, Curt. Hey, I just wanted to follow up on Keaton's question. It was kind of aimed at the retail segment, but I wanted to kind of talk about construction and industrial. And, I mean, it's striking to me, given what lumber's done on kind of a year-over-year basis, you're still getting kind of double-digit positive price impact there. And I understand lumber isn't the full story, but I don't think we've really seen it kind of this disconnected in the past. And so I guess the question is, can the pricing you've achieved in those businesses kind of sustain even in a more normalized lumber environment? Or is there maybe some timing issues or anything else going on there?

Yeah, so I think they're probably – two different stories. So I would probably point to construction and say your instincts are absolutely correct. I think there's some benefit in timing in both lumber market and pricing and agreements and otherwise, so that there was a very good tailwind in Q2 that I don't think continues on in a normalized situation. I think by the same token, I'd say that We have improved that business and the team that's running SiteBuild in particular is getting more efficient and given the size and scope of their business, they should be able to have better than I'd say historical margins, but certainly there's a lot of tailwind effect in Q2. On the other hand, industrial I think is probably much more close to what I would call a normalized situation. And so there may be some adjustment, but not like construction. And I think you can probably look to historical and industrial plus some for their efficiencies and how they've expanded and how they've driven more value to the business as opposed to what I'd call the commodity sticks and panels, which were a much bigger portion of the business five years ago. So I think that's the way I would describe it, Kurt.

Okay. Yeah, I mean, that makes complete sense. And I mean, it kind of rolls into my next question and should we think about how you frame that in terms of maybe the construction segment seeing some normalization but industrial being fairly sustainable is that a fair way to think about the margin profiles of those businesses as well yeah that would be my expectation perfect okay and then just on the site the business You know, you talk about backlog still being extended. You know, while starts have pulled back, we still have kind of a record number of homes under construction. You talked about multifamily still being pretty strong. Is that something that you think could help potentially smooth the demand profile for kind of your residential exposed businesses? Or, you know, should we think of kind of single family starts still being the best proxy? Yeah.

No, I think that your instincts are good there, Kurt. Yeah, I would say the multifamily definitely does move it out and it's been much more resilient than I thought it would have. Probably when I talked to you a few years ago, I would have told you it only had a few year run, but it seems to be much stronger and it might have a lot to do with the affordability question and issue. I think the other thing that I would keep in mind is that if you're looking at national statistics on starts and permits and those areas, I'd encourage you to look more regional to where our facilities are because we don't necessarily mirror the national trends there. But overall, multifamily will definitely help smooth it out and help with any future capacity challenges.

Right. Okay. That makes sense. And just for my last one, on the retail side and within kind of the repair and remodel exposed areas, I was hoping you could talk a bit about what you've seen from the DIY and do it for me kind of over the course of the quarter. And as you speak with your home center partners, are you hearing any caution in terms of them perhaps taking a harder look at inventory levels and looking to get more conservative? Or do you think we've seen that largely play out?

Yeah, and I can't tell you specifically which customers, but I can tell you that they all seem to be very comfortable with where inventory levels are. Um, there's different, different retailers that I know aren't in different markets, different things, but, uh, the pro demand is still very, very strong. And so the retailers are seeing that, uh, and I think they feel very comfortable with where they are, at least in our products and, uh, in the building product space. So, um, It's lower than it was in terms of demand from the peak of the pandemic, but it's still very good relative to 2019. Got it.

Okay. Well, appreciate all the color, and I'll turn it over. Thank you. Yes, sir.

Thank you. One moment for our next question. That will come from the line of Julio Romero with Sidoti & Company. Please go ahead.

Hey, good afternoon. Thanks for taking my questions. I just wanted to kind of stay on the site-built section. You know, any way you could expand on the demand within the quote-unquote healthy regions, Mid-Atlantic, Texas, Colorado, are they kind of seeing generally the same level of healthy demand, same extent as lead times, or is there any variance within those three?

Yeah, what I would tell you is Texas is still very strong. The Mid-Atlantic is strong as well. just slightly maybe less strong, but still very high capacity utilization. And as both Mike and I called out, the Northeast is probably the area where it's weaker. And, you know, particularly upstate New York. So I think that's the way that I would look at it today, Julio. You probably are closer to the New York situation than I am.

Yeah, no, that makes sense. My other question is just really on working capital, if you could just talk about how you Expect that to trend for the remaining of the year.

Yeah, I'll let Mike do that. I think he's been doing a good job of building his stockpile.

Yeah, like I mentioned in my comments, working capital is up since year end, $385 million. We're very confident that will turn into cash in the back half of the year. Working capital has been pretty consistent. Cash cycle around 50 days. low 50s anyway, and about 15% of sales. So it's, you know, it's high now, but it's, loaner prices have been high and we're, you know, it's the seasonally busiest time of the year. So I'm very confident that that'll turn into cash back after the year.

Great. Thanks very much for the caller. I'll hop back in queue. Thanks, Julia.

Thank you. As a reminder, if you have a question, please press the stars and one key. One moment for our next question. That will come from Jay McCandless with Wedbush Securities. Please go ahead.

Hey, thanks for taking my questions. Hi, Jay. Hey, Jay. So, Matt, hey, on your comment about being able to increase value-add, you know, if you look this quarter, I think Mike said construction was at 75% value-add, industrial was at 71%. I mean, how much further can those percentages go, do you think, just with the products you have and the customers you have right now?

Yeah, that's a fair question. I would say in the site-built space, and you kind of have to go through it by business unit, too, because they're quite different. I would say on the concrete forming side, as I mentioned in my remarks, there's a very long runway. I would say they're probably somewhere in the 20 to 30 percent range of true value add. So they have a long ways to go. There's opportunities within factory built as well. Site built, I think most of what we do is value add there. So probably less of a runway, so to speak. And then on the industrial side, again, it's a conversion over from sticks and panels to more of our design engineered and manufactured packaging solutions. So we still think there's a lot of runway there too. And to me, my goal is to get as close to 100% in industrial as we can.

And then when you talked about the geographic dispersion and thinking about the areas where you guys have your presence, I mean, it typically the south region as the census defines it like 60 to 65 percent of starts and how much of your footprint in construction would you say is in inside that those states that make up that 65 percent uh that's a good question and i i can't give you an answer to that jay because i just don't know that but maybe we can circle back with that one okay um And then I guess the other question I had is, are there other opportunities when you look at Cedar Poly? What type of acquisition runway do you have for that type of business? Is it an industry or subset of that industry that is starting to grow? And I know several of your competitors have a pretty high percentage of recycled material going into their composite boards. But is there opportunity for UFP to eventually make maybe not into a segment, but to add on more businesses and get larger in that recycled space?

Yeah, absolutely. There are some other opportunities, not just with what I'll call poly, but also with some of our core materials. I think that's one of the things our innovation group is working on. I can't really talk much about it at this point, but very good instincts on that, Jay. We will definitely want to expand that. It not only makes sense from a recycling and environmental standpoint, but it makes a lot of really good business sense for us. So we'll continue to invest and try to drive that and grow it and scale it. Okay.

All right. Thanks for taking the questions. Thank you.

Thank you. One moment for our next question. And that will come from the line of Ruben Garner with the Benchmark Company. Please go ahead.

Thank you. Good evening, guys. Hey, Ruben. Hey, Ruben. A couple of, I think, more clarification questions in retail than anything else. Can you walk me through? So you said that your decorators, you know, Voyage product line, I think you said Voyage, but it was – The capacity was up 66% year over year, and you're still running full, but the decorator's brand overall was down 9%. Are you seeing most of the decline, and maybe you said it and I just misheard you, but are you seeing most of the decline in some of the accessory type products? Is it railing products or is it the other wood plastic composites?

Yeah, I think I'll give a clarification. I used an additional word in there. The 66% was an annualized number, but not all 66% of that was in place for the entire year so far. So within a quarter, it's not going to be that. But by the end of the year, we will have all of the 100% that we had originally talked about having in, and that'll be done. So for next year, that should be all fully functional. So that's part of it. The other part of it is that, you know, and again, it's always tough to look at the decorator's product line in a quarterly vacuum because, for example, a lot of it depends on when our customers want to take their inventory. Sometimes it's Q1, sometimes it's Q2, sometimes it's in between. And so I think I would encourage you to probably look at year-over-year kind of numbers maybe as opposed to just the quarter number. But that 66%, I didn't want it to be a head fit, but that's the annualized piece there.

Got it. And then just another clarification, what was the June comment about comps? And I guess what I'm getting at, and I think it was a retail comment, but I'm curious if you guys – what your thoughts are on how much of, you know, like ProWood, for instance, I think volume has been down on very difficult comparisons for the last few quarters. Some, I think, are speculating there was a lot of pull forward potentially with the shutdowns and the early COVID phases. Like, when do you think we get to the point that we start to return to growth? Or do you think that the more recent maybe declines are more driven by, you know, the consumer's got more on its plate with inflation and, you know, other expenses and that sort of thing. I guess if you could just kind of give your thoughts on all that.

Yeah, I think that's a really good question, Ruben. And I think what happened is that, and Mike alluded to this before, the shift in the marketing, or excuse me, the market value of the materials is a little bit earlier this year. And I think it's more fully baked in through Q2 in 2022 than it was in 2021. So I think my view would be going forward from the end of Q2 is probably the more appropriate way to look at it going forward. And we still see a good strong demand. And as I mentioned, not maybe as great as it was in 20 or 21, but still well above 2019 levels, which is what we kind of signaled earlier in the year as well. So from our standpoint, this should be a more normalized market scenario. And again, you've been around the industry long enough to know the jumps in lumber pricing and the fluctuations being so wide and so quick over the last couple of years have made it tough to kind of figure what normal is. But I think we're kind of getting there.

Got it. Perfect. Thanks, guys. Congrats on the strong results and good luck going forward. Thanks, Ruben.

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 you for any closing remarks.

As Steve Jobs once said, the most important part of innovation is being able to tell the story. And I believe the UFP story is very compelling. We have a 67-year history of earning great returns for shareholders. Our diverse end markets and balanced business model provide protection from market fluctuations and also reduce the impact of a single market challenge. We have steadily moved up the value chain with new products and services and more efficient operations utilizing automation. Our goal is to continue to expand innovation and move further up the value chain. We continue to transform from a product seller to a solutions provider, and we focus on helping ease a customer challenge and problem by providing a solution which is a better value for the customer and for us. Our long-term target is to consistently exceed an adjusted EBITDA margin of 10%. And our recent performance provides a blueprint which proves our target is achievable. To reach this goal, we will continue to improve as an innovator and we'll keep playing offense. I could go into more detail in the story. However, our audience includes some who may use that information for other reasons. It is, in fact, the double-edged sword of the public market, or double-edge of the public market swords. I want to say hi to Mark and Hank and Chris and hope you're enjoying the call today. What should this story mean to our investors and potential investors, including all of our teammates who are shareholders? That even if a temporary market downturn occurs, UFP is an excellent value. We appreciate your belief in us and will continue to prove that we are more valuable than the market recognizes today. Thank you and have a great rest of your day.

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