UFP Industries Aims for $60M in Cost Savings by 2026 Despite Tough Market Conditions

Insights from Earnings Call: UFP Industries (UFPI) First Quarter 2025

Management View

• CEO Will Schwartz emphasized that even though the beginning months of January and February were sluggish, the company saw an improvement in business activities every month leading up to the end of the quarter, with positive momentum carrying over into April. The total sales dropped by 3% compared to the previous year, reporting earnings per share at $1.30 and adjusted EBITDA reaching $142 million. Factors such as increased raw material expenses, aggressive price competition, and less favorable product distribution led to significant pressure on profit margins.
• The management team is implementing a cost reduction initiative aimed at achieving $60 million in structural cost cuts by 2026. They have further plans to make additional expense modifications should the market conditions worsen. Despite this, the firm continues to prioritize generating robust capital returns and sustaining a prudent financial framework.
• The revenue from new products reached $106 million, accounting for 6.7% of all sales. The management team has set a target to increase this figure to around 10% eventually. They emphasized the introduction of Surestone decking items and trim options as well as their initiatives aimed at expanding into more geographical areas.
• Chief Financial Officer Mike Cole highlighted a 3% decrease in sales totaling $1.6 billion, mainly because of a 2% fall in volume and a 1% cut in selling prices. The adjusted EBITDA margin dropped to 8.9%, which mirrors the effect of increased material expenses along with aggressive price competition. By the end of the period, the firm held onto $905 million in cash and maintained an overall liquidity position of $2.2 billion.

Outlook

• The management stated that the market situation observed in Q1 will likely continue throughout 2025. They anticipate demand to stay moderately lower across all sectors, accompanied by ongoing competitive pricing pressures.
• Deckorators anticipates faster expansion during the latter part of this year due to increased retail distribution and enhanced efficiencies resulting from their recent capital expenditures aimed at boosting manufacturing capabilities.
• The long-term objectives stay the same, with expectations for a 7%-10% increase in units and an EBITDA margin of 12.5%, however, the schedule to reach these benchmarks has been pushed back because of present economic circumstances.

Financial Results

• Sales in the retail sector dropped by 3%, totaling $607 million, primarily due to a 4% reduction in volume which was somewhat countered by a 1% rise in pricing. Notably, within Deckorators, Surestone decking represented more than half of all composite decking revenues, achieving a significant 24% boost in sales for this particular item.
• Sales in packaging fell by 3%, totaling $410 million, influenced by a 3% drop in organic units and aggressive price competition. However, the purchase of C&L Wood Products helped offset some of this decrease in volume.
• The construction sector's sales stayed constant year-over-year at $516 million, as a 3% rise in volume was counterbalanced by a 3% drop in pricing. There was strong performance from factory-built business demands, whereas site-built requests weakened.
• In the quarter, operating cash flow required an outflow of $109 million, mainly because of additional investments in net working capital during the season.

Q&A

• Kurt Yinger from D.A. Davidson asked about competitive pricing and market demands. In response, Chief Financial Officer Mike Cole stated that difficulties with packaging and construction profit margins will likely continue; however, retail profit margins are anticipated to enhance as a result of increased operational efficiencies and higher prices.
• Reuben Garner from Benchmark asked about Deckorators' plans for expanding production capabilities. The management explained that current and future investments in locations such as Selma and Buffalo are expected to facilitate a doubling of their market share within half a decade.
• Ketan Mamtora from BMO Capital Markets inquired about the company’s merger and acquisition strategy. The management emphasized having a strong lineup of opportunities spanning all sectors, showing a inclination towards smaller add-on deals yet remaining open to significant moves when they align well with their long-term objectives.

Sentiment Analysis

• Experts showed guarded hope for profit margins improving in the retail sector, bolstered by Deckorators' expansion and better operations. However, they remained worried about intense competition and doubts surrounding demands in both construction and packaging industries.
• During their prepared statements, management adopted a confident tone, highlighting strategic plans and efforts to keep costs under control. Nonetheless, answers provided during the question-and-answer session revealed a more guarded and defensive approach when discussing uncertainties related to market developments and price-related issues.
• In comparison to the prior quarter, analysts continued to express doubt regarding a near-term rebound, whereas the management maintained an unwavering belief in their long-term strategic implementation.

Quarter-over-Quarter Comparison

• The guidance language stayed cautious, as management kept stressing the importance of controlling costs and making strategic investments despite the unclear market situation.
• The emphasis on growing Deckorators and introducing new products remained constant, accompanied by gradual advancements in widening distribution channels and boosting production capabilities.
• Concerns from analysts regarding competition and price pressure within the construction and packaging sectors persisted throughout both periods.
• Management expressed continued faith in meeting long-term goals; however, they also acknowledged lengthier timeframes, indicating a more cautious perspective.

Risks and Concerns

• Management pinpointed relentless price competition and escalating material expenses as persistent hurdles, notably within the construction and packaging sectors.
• Experts expressed worries over the unclear outlook for the latter half of the year’s demand and the possible effects of tariffs on Canadian timber.
• The management intends to address these risks by implementing cost-cutting strategies, adjusting capacities, and making strategic investments in lucrative sectors.

Final Takeaway

In the first quarter of 2025, UFP Industries faced difficulties with a drop in sales by 3%, along with ongoing pressure on profit margins due to aggressive price competition and increased expenses. The company’s leadership is concentrating on implementing a $60 million reduction plan by 2026 alongside fostering expansion via investment in Deckorators and launching innovative products. Despite these efforts keeping their long-term goals consistent, market demands and prices continue to be unpredictable for this year, which leads to tempered hope among executives as well as industry observers.

Review the complete earnings call transcript here.

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