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Edited Transcript of UFPI earnings conference call or presentation 21-Feb-19 1:30pm GMT

Q4 2018 Universal Forest Products Inc Earnings Call

GRAND RAPIDS Feb 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Universal Forest Products Inc earnings conference call or presentation Thursday, February 21, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brandon Froysland

Universal Forest Products, Inc. - Director of Finance

* Matthew Jon Missad

Universal Forest Products, Inc. - CEO & Director

* Michael Richard Cole

Universal Forest Products, Inc. - CFO & Treasurer

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Conference Call Participants

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* Daniel Andres Jacome

Sidoti & Company, LLC - Equity Research Analyst

* Ketan Mamtora

BMO Capital Markets Equity Research - Analyst

* Steven Pierre Chercover

D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Welcome to the fourth quarter Universal Products, Inc. earnings conference call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to introduce this conference call to Mr. Brandon Froysland, Director of Finance. You may begin. One moment.

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Brandon Froysland, Universal Forest Products, Inc. - Director of Finance [2]

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Welcome to the Universal Forest Products, Inc. Fourth Quarter 2018 Conference Call. 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 opened up for questions. This conference call is available simultaneously and in its entirety to all interested investors and news media through our webcast at www.ufpi.com. A replay will also be available at that website through March 21, 2019. Before I turn the call over to Matt Missad, let me remind you that yesterday's press release 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.

At this time, I'd like to turn the call over to Matt Missad.

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Matthew Jon Missad, Universal Forest Products, Inc. - CEO & Director [3]

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Thank you, Brandon, and good morning, everyone. Welcome to our fourth quarter 2018 investor call.

As you know, our challenge for 2018 was to be greater than before. And once again, our operations met the challenge and set annual records for sales and profits. We also set sales records for the fourth quarter and posted pretax results from operations, which were a fourth quarter record. Like the New Orleans Saints, we know that the final score is what matters, and Q4 net income was not a record. Rather than trying to justify why it should be counted, we will use it as motivation to start a new streak of profit records in 2019.

A few highlights for the quarter include, sales reached a record $988.2 million for the quarter and unit sales were up 4%. Annual sales were $4.49 billion, up 14% over 2017. Earnings per share was down 1% for the quarter to $0.50 per share versus 2017. For the year, earnings per share was $2.40, a 24% increase over 2017.

EBITDA for the quarter was $63.6 million, up 11% over 2017. For the year, EBITDA was $266 million, up 12% over 2017. New products sales were $103 million for the quarter and $513 million for the year.

For 2019, we have sunset approximately 40 million of new products, which we still sell, but won't consider new and established a new target of 525 million for the year. As you know, we use gross profit dollars per unit as a tool to measure performance. This metric takes out lumber market pricing as a variable. We were very pleased that gross profit dollars per unit grew at more than double the rate of unit growth in the fourth quarter. Also during the fourth quarter, we closed on the acquisition of Pak-Rite, a mixed materials packaging

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We are excited about growing this presence throughout our network. We also hired a leader of our alternative packaging materials group, which will help us both with sourcing our internal packaging needs as well as providing additional packaging solutions to our existing and future customers.

The industrial space remains a strong focus for growth whether organically or by acquisition. The retail market remain solid, even though, there was a slight dip in sales versus a hurricane recovery-aided 2017.

Our focus remains on new product sales and expansion of our customer base. We expect continued growth in our expanding portfolio of Deckorators brand products, coupled with professional installations through our growing base of certified Deckorators contractors. We are also expanding our mix of UFP-Edge products with even higher-quality coatings and both smooth and rough surfaces.

In the construction market, we saw solid results as well. Manufactured housing saw fewer FEMA orders in Q4 than in 2017, again, due to the abnormal 2017 hurricane replacement orders. Site-built construction remain good in the markets we serve, and we expect the market to remain at levels, which will yield good results for UFP in 2019.

In the commercial construction and concrete forming area, we have streamlined our sales efforts and will be growing market share. Increased infrastructure spending could provide a boost too. As you can tell, we are excited about our business. We also recognize that we have areas of improvement, which we aim to correct.

We have several underperforming operations that did not meet their ROI targets. They will receive extra attention and focus to get them to target. We continue to analyze our SG&A spending to isolate expansion spending from core SG&A costs. The expansion SG&A spending includes; design specialists, research and testing facilities and personnel, product development and new product launch, expanding our e-commerce capabilities and acquisition-related costs.

We view these expansionary SG&A costs as an investment in future profitability at higher rates of return. Health care cost continue to exceed budget. And the company absorbed nearly $10 million in excess costs in 2018. We are adjusting the budget for 2019 and will be offering additional benefit options to help our employees better manage their health care costs where possible. Transportation costs have moderated due to lower fuel cost, which helped to fray some of the rising costs for drivers, equipment and regulatory restrictions, which hurt drivers and companies in local delivery situations. We expect higher costs in Q2 and Q3, if volumes approximate 2018 levels, but we have taken steps to mitigate those increases. Labor also remains a challenge. But we are seeing very good results from our investments in technology and automation, which reduced the need for unskilled labor, while still enhancing growth and career opportunities for our production teams.

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

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Michael Richard Cole, Universal Forest Products, Inc. - CFO & Treasurer [4]

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Thanks, Matt. Before reviewing the financial, I'll briefly address the lumber market this quarter. The fourth quarter ended up being another challenging quarter for lumber market volatility, as prices dropped significantly from September through November and then remained flat through the end of the year. This trend impacted our profit per unit on products we sell with fixed and variable prices. Fortunately, the strong balance we have in our product mix, along with other positive factors, allowed us to overcome the impact of this volatility and reported an improvement in our profit per unit again this quarter.

The downward trend in lumber prices did impact our overall sales levels though, which I'll walk through now.

Overall sales for the quarter increased 1%, resulting from a 4% increase in unit sales, that was offset by a 3% decrease in selling prices. Organic unit growth this quarter was only 1% though, coming in below what we've reported in previous quarters this year, primarily due to the impact of hurricanes that lifted our retail and manufactured housing unit volumes in the fourth quarter of 2017. Our new product sales initiative was another bright spot this quarter, as new product sales grew 13% and experienced 50 basis points of gross margin improvement.

Breaking down our sales by market. Sales to the retail market decreased $27 million or 8%, resulting from a decline in selling prices of 4%, combined with a unit decrease of 4%. Our unit sales decline was due to hurricane-related volume in the fourth quarter of 2017.

Excluding the sales decreases we experienced in our Gulf and Texas regions, which were impacted by hurricanes, we estimate our organic unit growth to the retail market was about 3.5% which is in line with results of previous quarters this year.

Our sales to the industrial market increased 11%, driven by a 12% increase in units, offset by a 1% decrease in selling prices. Acquisitions contributed 7% to unit growth, while organic growth was about 5%.

The organic unit increase was primarily driven by adding 134 new customers, 160 new locations of existing customers and $7 million of new product sales growth, as our efforts to improve market share continue to gain traction. Our overall sales to the construction market increased 1% due to a 5% organic unit increase offset by a 4% decrease in selling prices. Within the construction category, our unit sales increased by 18% to commercial construction customers, 7% to residential construction and decreased 3% to manufactured housing. We believe the decline in our unit sales to manufactured housing customers this year was due to an increase in our production last year to fill FEMA orders, resulting from hurricane damage to housing.

Moving down the income statement, our fourth quarter gross profit increased by $8.5 million or nearly 7%, surpassing our 4% growth in unit sales as our profit per unit improved. The overall gross profit increase was comprised of an increase in our construction market of $8.5 million to go along with a $6.5 million improvement in our industrial gross profits, offset by a $2 million decrease in retail and $4.5 million decrease due to unfavorable cost variances due to factors such as higher labor, overhead and transportation costs.

Continuing to move down the income statement. SG&A expenses increased about $4.5 million or 5%, which is slightly above our increase in unit sales but was on plan for the quarter, as acquired businesses comprised most of the increase. I should also mention that accrued bonus expense was almost $10 million. This leaves about $82 million in what we call our core SG&A, which was down from about $88 million last quarter.

Gross profit improvements and hitting plan on SG&A allowed us to report operating profit and EBITDA growth of 9.5% and 11%, respectively, well in excess of our 4% unit sales growth.

Below the operating profit line, I should point out that our interest costs were up about $1.4 million year-over-year due to higher rates and debt levels, and our investments income was down about $1.9 million due to unrealized losses on investments we carry in our captive insurance subsidiary.

Finally, our effective tax rate this quarter was almost 23% compared to 18% last year, when we reduced our net deferred tax liability by about $6.4 million as a result of the tax law change.

Moving on to the cash flow statement. Our cash flow from operating activities for the year was $117 million and comprised of net earnings and noncash expenses totaling $213 million, offset by a $96 million increase in working capital since year-end.

As I've mentioned on previous calls, we measure our cash cycle to assess our working capital management. Our cash cycle for the fourth quarter increased to 61 days compared to 53 days last year, primarily due to an increase in our days supply of inventory. Given the drop in lumber prices and anticipating a seasonal increase, our plants took advantage of the opportunity to position by inventory for the 2019 selling season.

Investing activities consisted of capital expenditures totaling almost $96 million, including expansionary CapEx and purchases of real estate totaling $45 million. Proceeds from the sale of real estate, including our Medley, Florida facility in Q1, were over $38 million and $54 million spent this year to acquire several companies that serve the industrial wood and packaging space.

Financing activities primarily consisted of $16 million in net repayments on our revolving credit facility and $75 million in senior notes issued under our existing shelf facility. We also repurchased almost $25 million worth of our stock this year at an average price of almost $29, and paid over $22 million of dividends at a semiannual rate of $0.18 per share, a 12% increase over last year.

With respect to our balance sheet and capital structure. Our net debt was about $202 million at the end of Q4 compared to $144 million last year, primarily due to $54 million of funding for business acquisitions.

Our balance sheet remains under levered and strong, with net debt at only 0.7x EBITDA and less than 16% of our total capitalization.

Consequently, we believe we could add $300 million in debt to continue to grow our business and still feel comfortable with our leverage and capital structure.

As we've discussed on previous calls, our highest priorities for capital allocation continue to be capital expenditures and acquisitions. We always seek the highest return for investors, and we'll shift the share repurchases as we did in Q4, if the price falls to predetermined levels.

Finally, our trailing 12-month return on invested capital is 14%, exceeding our weighted average cost of capital and up from 13.2% last year primarily due to the decrease in the federal corporate income tax rate.

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

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Matthew Jon Missad, Universal Forest Products, Inc. - CEO & Director [5]

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Thank you, Mike.

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

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Questions and Answers

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Operator [1]

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

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [2]

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First question, I want to touch upon, sort of, a high-level what you're seeing in housing? Q4 wasn't great, we know that, H2 also, back half of last year also had some affordability issues. But we've also seen now rates fall quite a bit in the last 3 months, so obviously, a lot of cross currents. Can you talk about what you guys are seeing in your various businesses as you look into the spring season?

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Matthew Jon Missad, Universal Forest Products, Inc. - CEO & Director [3]

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Yes, I think that's a great question, Ketan. And I just was out at the International Builders Show and talking to a lot of builders. And there's still good optimism. They seem to have a pretty steady flow. The size of the units and other things are things that are adjusting to make it more affordable. But they seem pretty bullish on 2019 still.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [4]

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Okay. Are you seeing, sort of, at least from a broad standpoint any regions within the U.S. that are doing either better or worse than you had expected?

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Matthew Jon Missad, Universal Forest Products, Inc. - CEO & Director [5]

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Yes, I think, as we talk about it, so our -- on our site-built side, we do very well in the markets that tend to be more stable. During the downturn many years ago, we exited from, what we call, the boom and bust markets, and we haven't gone back in there. For example, California, I think, has probably been impacted more than others in a negative way. But we don't have a huge exposure there. So it's not a concern for us. But where we are heavily concentrated with our site-built operations, again, we feel very good about those particular markets.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [6]

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Got it. That's helpful. And then, turning to the lumber market. As Mike mentioned, we saw a big drop in Q4. It seemed like pricing, at least, on the west SPF grades rallied in the last 6 to 8 weeks, but seems like they are plateauing. What are you guys seeing out there in terms of either inventories or, kind of, just activity?

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Matthew Jon Missad, Universal Forest Products, Inc. - CEO & Director [7]

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Yes, I think, what we're seeing is, kind of, a typical seasonal up-tick. And in conversations with a variety of our vendors, they're not looking to see the highs that occurred in 2018. But they look at this being a more typical year. And obviously, the reorder process, which will happen over the next 30 days will help indicate whether inventories in the supply chain at the appropriate levels or not. But they all feel pretty comfortable about where the inventories are in the chain today.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [8]

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Got it. That's helpful. And then, final question from my side. What are you all expecting in terms of CapEx for 2019?

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Michael Richard Cole, Universal Forest Products, Inc. - CFO & Treasurer [9]

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We are planning for about $95 million, Ketan.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [10]

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$95 million. And how much of that on average is, kind of, just maintenance capital versus more discretionary or expansionary CapEx?

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Michael Richard Cole, Universal Forest Products, Inc. - CFO & Treasurer [11]

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We're planning for about $55 million to $60 million in maintenance Capex and about $35 million to $40 million then in expansionary and efficiency CapEx.

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Operator [12]

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Our next question comes from Dan Jacome with Sidoti.

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Daniel Andres Jacome, Sidoti & Company, LLC - Equity Research Analyst [13]

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Just a couple of questions. First on the construction segment, I saw the price is down 4%. Obviously, your lumber prices volatility. I just -- could you give us a sense in terms to -- on that change versus last year, how much was lumber prices? I just am making sure it wasn't anything else I'm missing.

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Matthew Jon Missad, Universal Forest Products, Inc. - CEO & Director [14]

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Yes, I think it's primarily driven by just year-over-year lumber market. At least, that's what we're seeing.

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Daniel Andres Jacome, Sidoti & Company, LLC - Equity Research Analyst [15]

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All right. Okay. I figured. And then, SG&A, obviously, you mentioned some discretionary SG&A expenditure. Do you have a sense of what SG&A dollars might be up, I'm not looking for something exact, but would you -- similar cadence to this year in the mid-single digit range? Or should we expect some sort of outlier moving in that?

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Matthew Jon Missad, Universal Forest Products, Inc. - CEO & Director [16]

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No, I think you're exactly right, kind of mid-single digit is about the right level.

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Daniel Andres Jacome, Sidoti & Company, LLC - Equity Research Analyst [17]

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Got it.

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Matthew Jon Missad, Universal Forest Products, Inc. - CEO & Director [18]

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And it would be impact unit sales too, Dan, just to be clear, in case lumber market differences.

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Daniel Andres Jacome, Sidoti & Company, LLC - Equity Research Analyst [19]

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Sorry, I missed that last point.

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Matthew Jon Missad, Universal Forest Products, Inc. - CEO & Director [20]

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Based on the unit sales basis. So...

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Daniel Andres Jacome, Sidoti & Company, LLC - Equity Research Analyst [21]

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Oh, right, right. Yes, okay. And then, on the Wolverine deal, I don't know if you can comment on it yet. Any thoughts there? I was just wondering what percent of their, maybe, revenue or business is the hospitality segment per se and how much might be other industries?

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Matthew Jon Missad, Universal Forest Products, Inc. - CEO & Director [22]

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Yes, I think, for the most part, they are a furniture component supplier. And we're really excited about the technology that they have. So for us, that's what we're more focused on. And hopefully, we'll get that transaction completed here in the next 30 to 60 days. And we're excited about it.

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Daniel Andres Jacome, Sidoti & Company, LLC - Equity Research Analyst [23]

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Terrific. It sounds like the management is going to stay into the Universal family for the long term or for the next foreseeable future?

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Matthew Jon Missad, Universal Forest Products, Inc. - CEO & Director [24]

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Yes, we certainly hope it's for the long term.

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Daniel Andres Jacome, Sidoti & Company, LLC - Equity Research Analyst [25]

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Okay. Great. And then lastly, I just wanted to pick your brain here on the infra-spending, I don't know if you have any insights on what's happening on the Hill? How likely do you think we'll see something in the next 18 months? Just because of what's happening now and then that was it.

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Matthew Jon Missad, Universal Forest Products, Inc. - CEO & Director [26]

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Yes, I think the infrastructure spending. Obviously, there seems to be a consensus that more infrastructure spending is needed. Your guess is better than mine, as to whether they can come together and agree on anything. But I would expect that there'll be something that happens midyear or certainly end of Q3, but the scope of it, I couldn't tell you.

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Operator [27]

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Our next question comes from Steven Chercover with Davidson.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [28]

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So Matt, you indicated that retail had a tough comp versus 2017. How is it trending through the first half of Q1 '19? And do you expect to post the mid-single digit growth that you enjoyed through the first 3 quarters of last year?

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Matthew Jon Missad, Universal Forest Products, Inc. - CEO & Director [29]

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I can't really comment on the specifics there, Steve. But I can tell you just, kind of, our outlook. Our outlook is that, it's going to be, kind of in that mid-single-digit range of growth. So we'd expect, again, on a unit sales basis obviously because of the lumber market pricing being down. If you -- if we're focused on unit sales growth that's kind of what we're looking at. And my conversations with the retail community indicate that, that's what their expectation is.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [30]

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Yes, I don't know how the market will react to the tiny EPS miss, but I thought your EBITDA performance was really good, and I know that's how you focus on margin dollars. Switching to inventories, they were up 21% year-over-year, which, I guess, is a little surprising given how lumber fell in the quarter. So would you say that maybe, you took a bigger advantage of what was a pretty compelling lumber market that you had in the last several years?

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Matthew Jon Missad, Universal Forest Products, Inc. - CEO & Director [31]

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Yes, I think we were fairly aggressive on our positioned buying this year. Obviously, we can take long positions because we are going to deliver the products, and we feel very comfortable with what we've done so far. And the takeaway, so far, has been consistent with what we expected. So we would expect our inventory levels to drop, as they typically would by end of Q3 or first part of Q -- end of Q2 or first part of Q3.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [32]

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Yes, I mean, I know you don't speculate. So that's a testament to your comfort, I suppose. And then finally, with -- buying in stock at an average price of $29 seems pretty darn compelling to me. So would you say that your shares, even up a wee bit, remain more compelling than most of the deals you're seeing in the marketplace?

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Matthew Jon Missad, Universal Forest Products, Inc. - CEO & Director [33]

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Yes. I think if you, kind of, look at the EBITDA multiples out there. Although, they've moderated a fair bit since, kind of, mid-last year, they're still aggressive for any deals of significant size. So obviously, we love our company. And we believe the value is there, so that's certainly something that we look at all the time.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [34]

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Yes, well the integration risk is pretty low too.

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Operator [35]

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And I'm not showing any further question at this time.

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Matthew Jon Missad, Universal Forest Products, Inc. - CEO & Director [36]

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Well, thank you again. And as you can tell, we are very excited about the future and the opportunities for both unit sales improvement and profit growth. Our focus is on providing an excellent return to our shareholders over the long term. And fortunately, we have an outstanding team of over 12,000 members, who work hard every day to achieve that goal. I am very proud of what they have accomplished so far and know that we are capable of much, much more in the future. And you can tell from our share repurchases last quarter, that we see great value in our company, especially when we can purchase at a significant discount to what we believe the fair value to be. Thank you again for your investment and trust in us. Have a great day.

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Operator [37]

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Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.