UFP Industries Inc (UFPI) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2020 UFP Industries Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker, Mr. Dick Gauthier, Vice President of Business Outreach.

Welcome to the Fourth Quarter 2020 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. A replay will also be available at that website through February 26, 2021.

Before I turn the call over to Matt Missad, let me remind you that the February 24th press release, yesterday's quarterly filing and today's presentation include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the company's expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in the press release and in the filings with the Securities and Exchange Commission.

Now I would like to turn the call over to Matt Missad.

Thank you, Dick, and good morning, everyone. As you can see from the press release, the UFP family of companies is blessed. 2020 was a unicorn, a convergence of many once-in-a-lifetime events in the same year. Instead of collapsing under the intense pressure, our UFP team demonstrated the work ethic, experience and quiet competence to overcome adversity and post our best year ever.

I want to give a special shout-out to our production teammates who are able to work safely every day in their facilities to make sure our customers' needs were met. Thank you to all of my UFP teammates for an amazing 2020.

You have seen the incredible financial performance, and Mike will provide more analysis shortly. I would like to cover some key takeaways from 2020 as well as providing a backdrop for how we look to grow in 2021.

My first takeaway is $5.14 billion, a new sales record and the first time we've eclipsed the $5 billion mark. The next takeaway is EBITDA margin of 8.4% for the year. That is a number that didn't seem achievable just 3 years ago. Thanks to heightened demand and a focus on new value-added products, innovation and efficiency gains, we learned that an 8% EBITDA margin is attainable and can even be exceeded with the right mix of our new products, new structure and new technology.

Speaking of our new structure, we are already reaping many benefits since it was implemented in January of 2020. This new structure enabled us to react quicker to the lockdowns and to lever our scale and geography to better serve customers when extraordinary demand and crimped supply chains combined to cause product shortages.

The entrepreneurial spirit within our new business units and segments was unleashed as planned. Our leadership teams were able to focus specifically on their business unit or segment and implemented growth plans more quickly than we would have been able to do under the old structure. These leaders have created excitement in each business unit and have developed runways for accelerated growth. I am confident that they can execute their plans while still maintaining a strong balance sheet.

As a result of all the new opportunities and pathways for success, demands for capital are making our capital allocation process more competitive and will raise the return on investment bar for green-lighting future projects. We will talk more about capital allocation in a few moments.

Along with all the wins, 2020 also had areas where we did not perform as well and must improve. One of those areas was our Commercial Construction business unit. This unit was hit hardest by COVID lockdowns and has underperformed for the last few years. We undertook a complete review of the business to determine whether it was sustainable and whether our execution challenges were self-inflicted or externally driven. We have created a new path forward, which includes streamlining our operations team, exiting unprofitable product lines, consolidating facilities and sizing staffing levels based on actual, not anticipated sales volumes.

As a result of these changes, we took fourth quarter charges of $15 million against earnings for goodwill and other asset impairments. We addressed obsolete inventory caused by customer demand changes and expense costs of facility closures and related employment obligations.

In the aggregate, these charges and the operating losses in the business unit totaled nearly $40 million in 2020. That is unacceptable and will be fixed. In fact, this terrible result provides the biggest turnaround opportunity for 2021. Even after the facility consolidations, the Commercial Construction business unit is budgeted for modest sales increases over COVID impact in 2020 levels and will be profitable for 2021.

If we achieve this level of performance, as well as reversing other operational losses in other business units, it will create a $50 million EBITDA improvement over 2020. Of course, some operations who dramatically exceeded expectations in 2020 may not perform to the extraordinary level like they didn't before, but correcting the underperformers from 2020 would be a huge boost to overall results in 2021.

Last year, we spoke about improving project management and speed to market with new products, talked about gaining manufacturing efficiencies through automation, specialization and consolidation and growing value-added sales more quickly. We made progress in most of these areas in 2020, but we still have much room for improvement. Each segment added resources for 2021 to drive more new products and better evaluate sales performance as well as the cost of existing products. We are taking advantage of our geography better than in the past and shifting production of like items to fewer regional locations, which allows for equipment improvements and more manufacturing efficiencies creating lower cost in production overall.

Our national sales teams are working with national customers to better identify product and service offerings while leveraging our design, engineering and testing capabilities across all markets. As we continue to evolve our sales and management processes, I still believe we will better leverage our SG&A costs as a percentage of gross profit dollars as we grow, bringing more profit to the bottom line. This will become even more pronounced in 2022.

In addition to these big picture takeaways, I'd like to highlight a few areas from each segment. In the fourth quarter, Retail Solutions continued its strong growth. Net sales were up 76% over 2019. As we advised at the end of Q3, the declining lumber market impacted pressure-treated margins in retail in Q4, but unit sales remained very strong, including our value-added product sales.

Deckorators' new production capacity and wood/plastic composite is now up and running, adding another 35% to 40% to the total capacity. And we just began a project to double our patented mineral composite capacity. The first part of this mineral composite capacity will be operational in Q4 of 2021, with the remainder coming online by the end of Q2 in 2022.

The Deckorators brand, with sales continuing to climb, also garners more admirers and the unique mineral composite product is a contractor favorite. ProWood FR, the fire retardant product, grew rapidly in 2020, reaching nearly $100 million in volume. This capacity will continue to grow with our expansion of fire retardant production in the Dallas, Texas market, which started in January of 2021.

The Outdoor Essentials business unit will be adding capabilities in more mixed material fencing production as well as expanding the lawn and garden projects, including our new line of planter boxes and raised garden beds for 2021.

The Dimensions business unit, which is being rebranded as handprint, has seen its remarkable growth continue in Q4. For 2021, adding products to be sold through traditional craft and hobby stores and e-tailers will bring even more scalable opportunities for this business unit.

And UFP-Edge is expanding its finishing capabilities and consolidating production centers to get more efficient in the manufacturing and finishing process. We expected sales to continue to climb rapidly.

E-commerce sales continued to accelerate, racking up over $128 million in 2020 sales, nearly doubling the 2019 total. We have invested more resources and are improving distribution and logistics to accommodate this anticipated growth.

In the construction market, sales grew to $508 million for the quarter and saw margin enhancement as they began to recover from the margin losses suffered when the lumber market rose rapidly in Q3. Unit sales to Site Built rose 16% during the quarter, and our backlog remained strong for Site Built components for both single and multifamily projects. We will be adding more capacity in fast-growing Texas in 2021.

Factory Built also remains very strong, with unit sales growing 11% during Q4, with a focus on affordable housing, manufactured housing is an excellent solution. We expect our new product sales to this market to also grow significantly in 2021.

Our Concrete Forming business unit is seeing increased demand for its rental programs as well as its designed, engineered and manufactured formwork solutions.

In the industrial market, unit sales were up 10% for the quarter, of which 6% was organic growth. For the year, unit sales were down only 1%, erasing almost all of the COVID-related shortfall. This industrial segment has recovered nicely and is well poised for continued growth in 2021.

We continue to rationalize our product offering by focusing on structural packaging, OEM products and protective packaging. Our solutions selling using our in-house design, engineering and manufacturing capabilities gives us a distinct competitive advantage.

One of the obvious questions as we look ahead in 2021 centers on the lumber market. What is going on? The big picture has demand exceeding supply, with supply being less than historical quantities in North America. Rail challenges in Canada and elsewhere are causing delays in the SPF supply chain. The impact of more winter weather on demand will be seen in the next few weeks. The storms in Texas have caused a temporary decline in demand, but the Texas mills have been affected as well, keeping supply more in line with demand.

In order to protect our customers from supply uncertainties, we have expanded our purchases and used our international buying power to ensure that we could supply our customers. Some items are already forecasted to be in short supply, and our experienced purchasing team is monitoring the situation very closely to keep ahead.

The second quarter takeaway will be a key indicator for the year and will determine lumber prices as well. I would like to thank our vendor partners for working with us for our increased requirements. As the mills consolidate, they have more opportunities to implement their supply strategies in light of expected demand, and our long-term relationships with the mills certainly help us meet our customers' needs.

Also, new products continue to grow. As I mentioned, each of our segments is increasing its investment in developing, marketing and selling new products, which we expect will result in increased sales of new products in the future. New product sales were $131.8 million for the fourth quarter and $538 million for the year. We sunset $13 million of 2020 new products, which establishes a base of $525 million for 2021. We are targeting $548 million in new product sales for the year.

Our capital allocation strategy targets acquisitions at reasonable ROI-based values first, followed by greenfield growth and automation and efficiency projects. In addition to the 6 acquisitions we announced in 2020, we have several acquisitions in the pipeline. Our focus areas for acquisitions include: industrial targets, which help us achieve our objective of being the preferred global packaging solution provider; new products and brands in our retail market; new products and services in our construction market; and finally, patented or proprietary value-added products or services.

How do our recent acquisitions fit within those strategies? Our largest and most recent acquisition, PalletOne, gives us a significant new platform from which to add other products and services and brings in a new customer base as well.

Some of you may wonder, why did we acquire PalletOne? There are several good reasons, including one of the most important, the talent of their team and the symbiotic company culture. We have looked at the industrial portion of their business for many years, but without our new organizational structure, it would have been too difficult to reach the synergies.

PalletOne has a focus on high-quality machine-built pallets that made them successful where we were not. Their automation and integrated supply chain strategies present learning opportunities across our existing footprint. And they have proven that their operational excellence can produce double-digit EBITDA margin. Other benefits we see are the sales synergies by adding our protective packaging solutions to their unique customer base and the ability to integrate recycling and rebuild solutions.

Sunbelt wood preserving, which was part of the PalletOne acquisition, allows us to incorporate other manufactured and value-added products to a new customer base. Sunbelt has an excellent reputation in the marketplace and operates a business we know well. With consolidation occurring in the treated products manufacturing industry, it makes sense to partner with an industry leader. This consolidation is further evidenced by the announcement this week that Sunbelt is acquiring the assets of Spartanburg Forest Products. This will further expand the geographic reach of Sunbelt and allow economies of scale and efficiencies in the supply chain.

Steve Michael of Spartanburg has been a great advocate for the industry, and this transaction will allow for a smooth transition to his well-deserved retirement, while allowing the talented team members of Spartanburg and Sunbelt to continue growing and improving the business. Although the core treated business carries a lower margin than industrial, by using their distribution platform for additional value-added products, the Sunbelt business is expected to generate a strong return on investment.

Another industrial acquisition, T&R, brought us a new runway in agricultural products with ample potential for scaling with other UFP operations. And the international partnership with Enwrap in Europe furthers our ambitions to be a global packaging solutions provider.

As an example, last March's acquisition of Quest brought architectural millwork expertise to our network, which we already have introduced to several other UFP customers and manufacturing locations. Likewise, the October acquisition of Atlantic Structural and Affiliates brings new products as well as steel components, which we will scale to additional geographic locations. The twin goals of synergy and scalability for acquisitions will be achieved more rapidly under our new structure.

And on the proprietary products front, our FRCT acquisition, now named Performance Formulation Solutions, will bring a new level of research and development to enhancing and protecting wood products to create longer life and more sustainable building product options. Their fire retardant formulation is the first of many improvements we expect to make.

For acquisitions in 2021 and thereafter, we expect that new target companies will bring similar qualities to our business units and accelerate growth in sales and profits. We have added more resources to our internal M&A team to help each business unit identify and negotiate acquisition opportunities as well as streamlining the closing and post-closing transitions. We remain committed to improving our return on investment and not merely growing for the sake of growth.

In addition to capital used for acquisitions, we expect capital expenditures of $115 million in 2021, up from $100 million in 2020. This increase will fund automation projects as well as expansion in several business units. We intend to use the remainder of capital generated for cash dividends and opportunistic share repurchases. We are pleased that the Board increased the cash dividends to $0.15 per share for the March 2021 dividend, which represents a 20% increase over 2020.

Recruiting and retaining employees remains a critical focus area. As I have stated, I believe we have the best team in the industry, and 2020 provided a great example. We want to reward our employees for performance. And fortunately, we were able to do that again. In fact, we are so thankful for the efforts of our hourly production employees that we reduced our calculated executive bonuses by over $5 million, and those dollars plus additional dollars are being used for special hourly employee benefits and additional bonuses to, again, reward them for their terrific efforts during 2020. Special bonuses and benefits to hourly employees exceeded $25 million for 2020. Thank you, again, to our hourly employees.

We have expanded our recruiting to better market our company to new job seekers and broadened our outreach to make sure that all demographic groups are aware of the opportunities for them at UFP. We encourage the best performers to work with us.

As I've stated, the outlook for 2021 is quite optimistic. We have good visibility from our customers for the next 90 days and demand looks solid. It is difficult to predict the effects of the pandemic and what we hope is the full reopening of the country. While we want to make sure we help those who have lost their jobs and their businesses due to lockdowns, we also urge politicians to use restraint when considering more borrowing from future generations. We prefer opening the economy and allowing the current demand cycle to function. A stimulus could be saved until it is needed.

Now I'd like to turn it over to Mike Cole, who will provide more details on our financial performance.

Thanks, Matt, and hello, everyone. This quarter provided another example of how the balance in our business and diversified product portfolio are advantages when market conditions provide challenges. In this case, a volatile lumber market and a significant drop in demand within the Commercial Construction markets we serve.

Our results this quarter are highlighted by a 15% increase in unit sales, resulting from strong demand in the retail market and a 70% increase in operating profits, driven by profitability improvements on value-added products and new products, production and SG&A cost efficiencies and the planned issuance of long-term stock grants associated with our bonus plan.

For the year, we're pleased to report strong improvement in our profitability as our 41% growth in operating profits outpaced our 6% increase in unit sales. Our return on invested capital over 20% and operating cash flow of $336 million, in spite of record high lumber prices and strong retail demand, resulting in a year-over-year increase in our net working capital.

Now I'll provide some additional color on the quarter, starting with our income statement and sales by segment. Sales to the retail segment increased 76%, consisting of a 38% organic unit increase and a 38% increase in prices. Unit growth continues to be strong across all retail business units, but especially so in value-added categories like Deckorators, Outdoor Essentials, Dimensions and Edge.

New product sales for the retail segment were also strong, growing over 71%, while gross profits on those sales grew 73% in spite of high lumber costs.

Sales to the industrial segment increased 25%, consisting of a 15% increase in selling prices, a 4% contribution from recent acquisitions and a 6% organic unit increase. Organic unit growth consisted of 3% growth driven by new customers and another 3% driven by new products.

Finally, our sales to the construction segment increased 24%, driven entirely by a 24% increase in selling prices as unit sales remained flat but varied greatly by business unit.

Our Site Built and Factory Built units performed well with 16% and 11% unit growth, respectively. Recent acquisitions contributed 2% to our Site Built growth. Unfortunately, this growth was offset by organic unit declines of approximately 35% for each of our Commercial and Concrete Forming business units as the pandemic adversely impacted demand.

Moving down the income statement. Our fourth quarter gross profits increased almost $30 million or nearly 19%. This increase consisted of a $22 million improvement in retail, a $7 million increase in construction and a $5 million increase in industrial. The profitability improvement of our retail segment resulted from a combination of factors, including strong organic growth and leveraging our fixed costs, higher profits per unit on sales of our value-added products and growth of higher margin new products.

Within the construction segment, the gross profit increases of our Factory Built and Site Built business units totaling $21 million was offset by declines in our Commercial and Concrete Forming business units totaling $14 million. Finally, the gross profit of our industrial segment increased 11%, slightly above our unit sales growth of 10%, which we were pleased with, given the volatility of lumber prices during the quarter.

Continuing to move down the income statement, SG&A decreased by $18 million to $87 million. This overall decline was comprised of increases of $7 million in compensation related -- compensation and related costs and $3 million added from recently acquired businesses offset by a $4 million decrease in travel and other costs associated with the pandemic, a $2 million decrease in our bad debt expense and a $20 million decrease in bonus expense due to an increase in our use of long-term stock grants to settle bonuses instead of cash payments.

Shared grants are expensed over the service and vesting period, and we believe this is a great way of encouraging employee retention and aligning their interest with shareholders.

Below SG&A, we recorded $15 million in asset impairment charges this quarter related to actions we're taking to reduce our Commercial business units capacity and align it with expectations of lower market demand. We believe these changes position us for a return to profitability in 2021. The impairment charges are offset by reductions in certain earn-out liabilities totaling $4 million.

Finally, we're pleased to report a 55% increase in operating profits, excluding the impact of net impairment charges and a decrease in bonus expense.

Moving on to our cash flow statement. Our cash flows from operations for the year totaled $336 million and consisted of net earnings and noncash expenses totaling $339 million compared to $259 million last year and a $3 million increase in working capital since the end of December 2019 compared to a $90 million decrease in the prior year.

As I mentioned earlier, our net working capital this year has been impacted by strong retail demand and record high lumber prices. Consequently, we think our cash cycle is the best metric for assessing how efficiently we're managing our working capital.

Our cash cycle improved to 45 days this year compared to 55 days last year. This improvement resulted from a reduction in our days supply of inventory, driven by strong retail demand and supply shortages. We also improved our collection cycle and improved the percentage of our receivables that are current to 92%.

We continue to have a balanced approach to capital allocation. Our investing and financing activities consisted of capital expenditures totaling $89 million, including expansionary and efficiency CapEx of $34 million; $65 million for acquisitions; $31 million of dividends; and $29 million of share repurchases we completed in Q1.

Lastly, we issued $150 million of long-term debt in August, anticipating the acquisition of PalletOne and Sunbelt, which we completed in fiscal January. With respect to our balance sheet, at the end of December, we had approximately $437 million in cash and $312 million in long-term debt, and our total liquidity was approximately $800 million. At the end of January, our liquidity decreased to $485 million as we completed the PalletOne, Sunbelt purchase for $259 million and as we build seasonal working capital impacted by higher lumber prices.

Given our expectations for continued growth and working capital requirements, we've exercised a provision in our credit facility that increases the long-term availability of the facility by another $175 million to a total of $550 million. All in all, we feel we have a strong liquidity position to support our planned growth, including our purchase of Spartanburg Forest Products later in Q1 or early Q2.

Looking to next year, we're planning to continue paying dividends at the current rate, which was recently increased 20% to $0.15 a quarter. We will continue to target share buybacks based on the amount we issue under our share-based compensation plans and when the price reaches our target. We believe depreciation and amortization and other noncash expenses will total approximately $90 million, and we're currently planning for approximately $115 million in capital expenditures.

This is quite a bit higher than last year as a result of the carryover impact of certain 2020 projects, plans to double the capacity of our plant that produces our mineral-based composite decking and trim products, CapEx to execute growth strategies associated with recent acquisitions, investments in real estate and to expand capacity and capabilities at several locations.

Our long-term goals continue to be growing our annual unit sales by 4% to 6% over positive GDP, growing our operating profits and adjusted EBITDA at a rate that exceeds our unit sales growth or in other words, increasing our profits per unit and earning a return on investment over our cost of capital.

That's all I have on the financials. Matt?

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

(Operator Instructions) Our first question will come from Ketan Mamtora with BMO Capital Markets.

Congrats on a very strong finish to the year in what was obviously a very difficult year for everyone. So congratulations. First question, maybe starting off with Deckorators. Obviously, you all are expanding capacity there. I'm just curious, how are you positioned right now to meet demand as we head into sort of the busy season in terms of construction activity?

Do you think you've got enough headway -- headroom to meet that demand or you think you might be capacity constrained for a while till the capacity comes online?

Yes. It's a terrific question, Ketan. I think we will already have expanded over last year with our wood/plastic composite line. So we think we're in good shape there. Our mineral composite line is growing very rapidly, and we do have a longer lead time there. So we are being a little more selective in the customers and the products that we're moving.

So I would say if the demand continues as strong as it is, it'll probably be a little bit short on the ability to take on a lot more customers on the mineral composite line this year until Q4.

Got it. And then is this -- the capacity increase in Deckorators, is it more focused on sort of the Vault or the Voyage line or more on the Trailhead side or is it more evenly spread out?

Yes. I would say that the wood/plastic composite is probably 65% to 70% of the total decking volume production. But obviously, the mineral composite line is growing faster and is going from basically 0 to probably somewhere in the 30% to 35% range of total, and we expect that to continue to take a larger share going forward.

Got it. That's helpful. And then, Matt, is there any way to kind of quantify how much EBITDA contribution you will get from the recently acquired businesses? Some sort of either on an EBITDA margin basis or total EBITDA contribution, any color would be helpful.

Yes. I think Mike probably can give you a little bit of color on that based on what we'll put in the 10-K in full.

Yes. I think the biggest one to look at, Ketan, is PalletOne and SunBelt, right? So the -- I mean we provided the sales numbers for 2019 and the trailing 12-month numbers through a good part of Q4. The EBITDA margins for the business, depending on which period you look at, and the margin would vary a lot between the 2 periods, just simply based on the level of lumber prices, if that makes sense, 6.5% to 7%.

Yes. And I think that's a blended rate as well, Ketan. And so that includes both the industrial part of the business as well as the retail part of the business.

Yes. As Matt mentioned earlier, the PalletOne side of the business is a much higher EBITDA margin, more in line with what UFP's EBITDA margins are on industrial. And likewise, the Sunbelt side of the business is more in line with what we would see on the ProWood side of our business.

Understood. Now that's helpful. And then just switching to lumber, obviously, we've had a big run. I'm just curious, if I -- are you starting to see any negative impact on demand from prices where they are in the middle of February?

Yes. I think with the economy being strong in many parts of the country, Ketan, I would expect if the prices continue to rise, we would see a demand impact. We haven't seen it quite yet, but just kind of some of the anecdotal information we have out there. We're basically, versus a year ago, probably $25,000 increase for the cost of a new single-family home, a $9,000 increase for a multifamily unit.

So it's getting significant. And there's product shortages in some categories, panels, OSB that kind of thing. But I think there's a decent balance in supply and demand. And if the economy opens up and the mills are able to run full out and run efficiently, I think, we'll be okay.

Got it. And then you mentioned in your prepared remarks, Matt, that to balance that, you all are looking at other regions to purchase lumber. Is there a way to kind of, maybe even on a percentage basis, how much you've moved and what is the kind of flexibility that you have for international purchases?

Yes. I think it's hard to say there are some products that lend themselves very well, I would say, nonstructural items, in particular. And we have definitely grown purchases in those types of products. Some of the structural lumber with engineered values tends to be a little more limited in terms of options, although there are places in the world where we can get back to.

So we have been expanding that international capability. And I think our international sourcing and sales team has done a terrific job in finding those new products as well as existing products that help us continue our growth.

Our next question will come from Reuben Garner with Benchmark.

Congrats on the strong close to the year, pretty impressive. Let's see, where to start. On the -- maybe I'll start with Deckorators. So how much -- can you tell us how much of that 80% growth was you guys introduced? And I think it started at the beginning of the fourth quarter, your kind of entry-level composite decking board. Is it fair to say it was a good chunk of that, and that would mean potentially you have a few more quarters of runway from business that you picked up in that part of the business?

I think in terms of actual sales, Reuben, I don't think it's a real significant portion in Q4. I think we expect it to be a significant portion in 2021. But if you're looking at Q4 2020 numbers, I don't think it's a significant amount of the actual sales volume.

Okay. And just to clarify, when you say mineral base, is -- that's the Eovations technology. So that's the -- okay. And your...

Exactly. Eovations technology, and that's in the Vault and Voyage brand.

Got it. And then on the -- well, I guess, to wrap up the retail part, so I think one of the concerns investors have had with names in this space is struggling with how you'll be able to grow a business that did so well in 2020. What are your thoughts on what the, I guess, the environment might be for that category for you guys in '21? Do you think you can continue to grow on top of that or do you view it as a difficult comp and even with your new product launches and everything that might be a tough thing to duplicate?

Yes. I think if you look at unit sales, I would say, Q1, we have a very good opportunity to exceed dramatically what we did in 2020. I think the comparisons get obviously much more difficult starting Q3, Q4. So again, as long as the demand is strong, I think the new operations that are part of the family now and the ability to help them grow and to be able to drive more value-added products throughout the entire organization, I'm very optimistic that we can continue to grow as long as the economy stays strong.

Our next question will come from Jay McCanless with Wedbush.

Congrats on a great year. So the first question I had is just kind of reconciling what you all put in the press release about Spartanburg where you said that the combined companies had 2020 sales of approximately $543 million. Was that Spartanburg standalone or was that Spartanburg and Sunbelt together?

That was Spartanburg standalone.

Okay. And they're probably going to have similar EBITDA margins to what you expect out of the pressure-treated business?

I think going forward, that would be the case. And Mike, I believe that Spartanburg carry a lower EBITDA margin.

Yes. Spartanburg would be more comparable, but maybe not quite as high as Sunbelt and ProWood.

Okay. And then -- and listening to some of your competitor calls and other names in the building product space, it's been kind of hit or miss with commercial. Some people say commercial is getting better. You guys said that you all had some issues with it this year. Could you maybe drill down into which specific areas of commercial, you're seeing the issues and some of the corrective actions you think you can take in the short term?

Yes. It's a great question, Jay. So I think some of them are pretty obvious. I think if you look at retail, in general, obviously, not much growth there, not a whole lot of store retrofits that kind of thing. The hospitality space was decimated by the lockdowns. So really nothing happening there either. Some of the commercial office environment have been very, very slow. They were impacted.

So those are the -- those would be 3 areas that I would specifically say 2020 was bad and the retail space will definitely take longer. So we've deemphasized a lot of those products and services and by focusing more on the areas where there is solid growth and a good sustainable future, that's where we're focusing our efforts.

If the other stuff comes back, that's great. We can make ourselves available to serve that market. But for right now, we're focusing on what's real and what's in front of us.

Understood. And then your large customers, the HD and Lowe's, both reported very good sets of numbers over the past couple of days. What are you hearing from those customers? And then maybe the larger home repair store industry, in general? I mean are some of the other big chains thinking this is going to be the potential for positive comps this year? And are they telling you guys to gear up and get ready for larger volume shipments?

Yes. That's been -- their message consistently is that they need more product, and they believe the sales are there. So I think that bodes well for us. They have a good optimism, and we'll be there to supply it.

Our next question will come from Kurt Yinger with D.A. Davidson.

I just wanted to start out on the lumber side. I mean pretty consistent upward trend in prices here in Q1, which typically, I think might pose a bit of a headwind for you guys. But with the relative strength in retail and pressure-treated, do you think that can maybe offset some of the pinch on the fixed product side or how are you thinking about the net impact, the different pricing structures just on kind of the ability to grow gross profits versus units during Q1?

Yes. I think you have a good handle on the overall picture, Kurt. There is a bit of a yin and yang to it. So if it -- prices continue to climb, it probably will be a short-term pinch in fixed priced items. But we're able to make some of it up on a variable price basis.

Mike, do you want to add some more color?

No, I mean that's -- that basically summarizes it. Wow, that's the unique ability of UFP and the balanced business model is rarely do you see us have to talk about the lumber market volatility impacting our results because of the great balance in the markets we serve in and the product portfolio.

Right. Okay. That makes sense. And I guess just sticking with that point, I mean, between PalletOne and Spartanburg, you're adding quite a bit on the treated wood side. I mean do you think that dramatically changes the seasonality or the skew of how we should think about lumber prices overall impacting the business? Or do you think, for the most part, it's still fairly neutral from a trend perspective on profitability?

Yes. I think there's a couple of factors in there, Kurt. So the kind of the geographic areas where Sunbelt operates and Spartanburg operates are still tend to be more of the warmer weather or certainly not the fringed North for the most part, although they do have facilities in the North.

I think the other part of it is our managed inventory programs, which I think kind of help with some of the issues you're referring to about seasonality and is going to be a bigger factor. I think we are finally getting to a spot in the size as we continue to grow where by balancing out the fixed products, variable priced products and doing more value-added, that product mix piece becomes more important and the seasonality relative to the different businesses has become less important.

Okay. All right. That's helpful. And just on the share grants and how that impacted kind of the SG&A number, is that something we should kind of expect to continue here in 2021? And how might that impact the year-over-year comps as we look at SG&A spending going forward versus what it's historically been and that bonus SG&A, I guess, specifically?

Yes. I think what I would say, Kurt, is just from an employee retention standpoint, as Mike commented, for us, having our employees be shareholders is really important and providing a very efficient and effective way for them to get shares is critical to our compensation structure and platform.

Mike, maybe you can give a little color on kind of the financial statement impacts.

Yes, sure. So that $20 million that we called out as being the decline in bonus expense, Kurt, is basically the impact of the share grants spread out into the future over the vesting period. And so we like the share grants a lot in terms of incorporating that in the bonus plan. So to the extent we continue to do that, you're going to layer in additional expense each year.

But yes, we think that that's -- assuming the same level of performance, the same type of bonus expense in total, it's going to have the same impact from one year to the next, but we'll be layering in additional expense each year to the tune of $7 million or $8 million.

Okay. That's helpful. Okay. And just lastly on the Site Built side. I mean I'm just curious with the constrained, I guess, supply side and builders really looking to catch up on significant backlogs, have you seen increased adoption of kind of those component products or anything like that? And is that an area of the business that you would perhaps look to grow in the future?

Yes. I think your debt on that issue, the componentization is definitely going to increase. Labor, obviously, also plays into this and the acquisition last fall of Atlantic Prefab and their related companies, I think, gives us another opportunity with new materials to do more of that componentization. They're very good at it. So we do look to expand that, and we'd look to do more and do more in our factories to help the builders relieve pressure on the job site.

Our next question will come from Julio Romero with Sidoti & Co.

Just wanted to piggyback on the question about the SG&A and the bonus expense. I agree that it may be the right move operationally, but just trying to think about how should investors think about a metric to kind of gauge your cost control efficiency going forward?

Yes. I think the question is really what kind of metric should investors look at relative to SG&A as a percentage of something to figure out whether we're managing it well or not? And I think the question probably is more broad than that, and that probably would include bonus in addition to the -- part of the SG&A discussion, right?

That's correct. Yes. But considering the share grant as being part of the pie now, I'm trying to think about what's the right metric to look at.

Yes. We tried to look at SG&A as a percent of gross profit dollars. Mike, maybe you can, again, add a little more color as to kind of the accounting side of it.

Yes. I think that's still the right metric, Julio. We like to look at the SG&A without the bonus expense in it at all and look at the SG&A as a percentage of gross profit. It takes -- it mitigates the impact of moving lumber prices, if that makes sense. And it also takes into account the shift in the business to become more value-added, which generally requires a lot more SG&A costs. So we still think that's the right metric. If you want to compare last year with this year, I think our bonus expense last year was $68 million or something like that. And this year, the total bonus expense was $80 million.

So you back those out of the SG&A numbers in the press release and look at those as a percentage of gross profit, you'll see a real nice improvement. Some of that is because of the pandemic. And there's probably $15 million to $20 million annually of travel and medical and other costs that we won't see repeated decline in those costs. But all in all, we still think we made a lot of progress on efficiencies this year.

Yes. Mike, maybe is there a specific percentage of PBOP overall that Julio should be thinking about relative to bonus?

Yes, that's a good point. I still look at the bonus expense, Julio, as a percentage of pre-bonus operating profit. And so I think 20% is a good benchmark. Obviously, that can move around a little bit just based on our return on invested capital because our bonus rates are driven based on whatever our return on investment is, but 20% is a pretty good historical rate.

Got it. And I guess just thinking about the mix of value-added to commodity sales, I'm not sure if I missed that earlier in your prepared remarks if you gave that for the quarter?

Yes. Mike?

I don't have that for the quarter, Julio. But for the year, it's about 2/3, 1/3. 2/3 value add, 1/3 commodity base, and that's a little bit -- that's down from last year. Last year, we were 70/30. And a lot of that, I think, is just simply because of the impact of lumber price appreciation on commodity products, it has such a prominent impact on the sales dollars and not quite as much impact on the fixed selling price products.

And our next question comes from Reuben Garner with Benchmark.

I just wanted to squeeze one more in, if I could. You talked about kind of the variable versus fixed, I think, gives you a balance to offset the volatility in lumber prices. But if -- I think it was 3 or 4 years ago when prices were elevated over kind of the winter and fell into the spring season that maybe caused a more pronounced impact for you guys, is that a risk we should watch out for? Is there anything you guys can do to offset it, just knowing kind of the price environment is elevated now or is that less of a risk for some other reason that I'm not thinking of and we shouldn't really necessarily model in kind of any margin pain in the second quarter for something like that?

Yes. I think a precipitous drop in the market, Reuben, always is going to leave a mark, so to speak. But I do think the balance in the business that Mike keeps referring to has helped. If we're not quite as dependent on the particular, I'll say, commodity-treated type product mix that tends to be the most volatile if the market falls during the busy selling season. But as you can see, the sales volumes have become a lot more normalized for a variety of reasons throughout the year. So other than wintertime, it seems as though -- as long as demand is strong, there is a better balance in the takeaway.

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

Well, as you can tell, I'm very grateful and excited about our team's exceptional performance. Their hard work and extra effort has put us in an excellent position to succeed. We're addressing all the areas that we can control, and we're also preparing for unforeseen challenges. Like the Tampa Bay Buccaneers, I'm confident that despite any challenges that arise, our team will overcome them, and we will win. Thank you for your time today. Thank you for your investment in us, and have a great day.

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