UFP Industries Inc (UFPI) 2003 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the universal second-quarter conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero, on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Tom Smith, of Fleishman Hillard. Mr. Smith, you may begin.

Good morning and welcome to universal's second-quarter 2003 conference call. This is Tom Smith with Fleishman Hillard. Joining us today are William G. Currie, Vice Chairman and CEO and Michael R. Cole, CFO. Before I turn the call over to Bill Currie, I'd like to remind everyone that included in this report are certain forward-looking statements with the meaning of section 21 (a) of the Securities Act of 1933 as amended and Section 21 (a) of 1934 as amended. Such forward-looking statements are based on the beliefs of the company's management as well as on the assumptions made by the information currently available to the company at the time of such statements were made.

Actual results could differ materially from those included in such forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainty. These factors and additional information are included in the company's reports on Form 10-K and 10-Q on file with the Securities and Exchange Commission. This call is the property of Universal Forest Products. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Universal is strictly prohibited. At this time I would like to turn the call over to Bill Currie. Go ahead, Bill.

Thank you, Tom. Good morning everyone and thank you for joining us on the call. I'll take a minute or two to give you an overview of our second quarter and then Mike Cole will get real specific on the financials, and then come back on and offer a business update and give you our outlook for the balance of 2003 and where we think the company's going.

Let's start with the second quarter results. You know, it's fun to tell -- tell people you -- "I told you so," and our management team had a very strong feeling about this second quarter and the rest of the year. We knew we had the business booked. We knew the weather hurt us severely in the first quarter. And now we're starting to see the fruit come on the tree and the company's moving where we thought it would go, so it's -- you know, it's fun to say that you were right for once.

We grew our net sales by about 9-and-a-half percent on sales dollars, and we had about a 8% decrease in the lumber market quarter to quarter, so we had a unit sales increase of almost 15%, as well as an earnings increase of almost 15%. So it's a -- you know, it's a nice powerful quarter. We still could have done better. We had some -- we had some weather problems. We had some capacity problems. We still could have done better, but we're pretty pleased with the results. We continue to remain optimistic about the third and the fourth quarters and the next couple years. Our site built backlogs are strong and they're turning into good orders. The economic and market projections are getting better. It's nice to see Buffett come into the manufactured housing industry. We think there will be some strength there and that will be an opportunity for us in the future. But before we get too specific about this, I'll turn it over to Mike and he'll discuss our financial results for the quarter. Mike.

Thanks, Bill, and good morning, everyone. I'll start with a review of our income statement for the quarter. As Bill mentioned, our overall sales were up 9%, in spite of an 8% decrease in the lumber market. We estimate that the decline in the lumber market had the effect of reducing our selling prices by approximately 5%. Therefore, our overall unit sales were up approximately 14%. Furthermore, we've estimated that acquisitions rose 7% of our unit sales increase and I know -- and that our organic unit sales increased by about 7%. By market, our sales to the DIY market increased 14% for the quarter. Primarily due to the treating services agreement we entered into in November of last year with six quality wood plants in the Midwest, and our acquisition of its composite plant. Our sales for the manufactured housing market were down 13% for the quarter, which was significantly less than the 27% decrease in production the industry has reported so far for the quarter.

Our sales to the site built construction market increased 15% for the quarter - driven primarily by new operations including our framing joint venture and strong unit sales growth out of existing -- out of existing plants. Finally, our sales to the industrial market were up 10% for the quarter, primarily due to organic sales increases spread over several plants. Moving down the income statement, our gross margin increased to 14.3% from 13.6% last year. We believe this is primarily due to the lower level of the lumber market this year, combined with a slight increase in our ratio of sales of value-added products. Our ratio of value-added product sales to total sales increased to 49% this quarter, from 48% last year.

Selling, general, and administrative expenses as a percent of sales increased to 8-and-a-half percent from 8.2% last year and again was primarily due to the impact of the lower lumber market on our selling prices. With respect to dollars, new operations comprised 1-and-a-half million of the 5.4 million increase in SG&A. The remaining 3.9 million increase in SG&A of the core business represents a 9% increase from last year. Our interest costs for the quarter increased almost $900,000 due to the increase in our average debt balance, combined with an increase in our average volume rates. As you might recall, we issued 55 million of long-term notes last December and used the proceeds to reduce the amount outstanding on our revolving credit facility. Finally, our diluted earnings per share were up almost 15% to 94 cents a share. But I'd point out that if you were to exclude the after-tax gain on the sale of our airplane from last year's results, diluted earnings per share were up over 20%.

Now I'll move on to our cash flow statement. Our cash flow from operations improved by almost 23 million compared to last year's second quarter, as we've sold through the extra inventory we carried at the end of last year and throughout the first quarter that resulted from opportunistic buying and poor weather. I'd remind everyone that seasonality still has a significant impact on our working capital at the end of the second quarter and we expect cash flow from operations to improve substantially through the third and fourth quarters. Our cash cycle for the quarter increased to 42 days from 41 days last year. This increase was primarily due to a two-day increase in our day’s supply of inventory to 28 days, offset by a slight improvement in our payables cycle. Capital expenditures totaled almost 21 million for the year-to-date, compared to 13-and-a-half million last year, as a result of increased spending on expansionary items. For example, we've expanded the capacity of our composite decking plant and we have completed three new plants this year.

We expect to spend approximately 19 million for the balance of the year, which keeps us on pace with our stated target of approximately 40 million. We repurchased 25,000 shares of stock in the second quarter, for an amount totaling approximately $400,000. We have [board] authorization to buy back up to 1-and-a-half million additional shares. A couple of points I'd like to make about the balance sheet. Included in debt was approximately 80 million outstanding on our revolving credit facility, which has a total availability of approximately 173 million. And our leverage ratio at the end of June was 48% versus 49% a year ago. That concludes my comments. Now Bill will update you further on the business. Bill.

Thank you, Mike. Let's talk about a couple things and then we'll open it for questions and answers. First, let's -- a little bit on the lumber market. It was very soft for the first -- first two quarters. Towards the end of the second quarter, the market started to firm up, and right now, it's -- it's adding to our revenue. We're seeing our weekly sales adjusting up nicely to the increases in the lumber market. Also, on the panel side, the OSB market was a bright spot. That's very firm. A lot of the unproductive plants have been closed down, and the demand is still strong, so we're seeing some nice movement in the OSB pricing.

We think for the third and fourth quarters, we'll have relatively good demand and we should have reasonable pricing. And if that's the case, then that will be a -- be a positive for universal. On the DIY side, performance, our Home Depot sales were up 13% in sales dollars, primarily driven by the movement of our Everex composite decking which they like very much. They continue to give us new markets as we increase capacity because the product is comping very strongly in the stores. Also, our TSO agreement with the quality plants has given us additional treated market share, and we are growing our installed sales. We started out with fencing. We just opened up our first deck installation in Atlanta. You read our press releases. We joint ventured with USA deck and we have a very unique approach to that. We'll be spreading that throughout the depot -- various depot markets throughout the year.

On the CCA conversion, all of our plants have been hard -- hard converted. The equipment has been changed. Our conversion's on target. In about two weeks, we'll start the soft conversions where we flush the systems one at a time, we move the CCA chemical to the next plant and we make the change into an ACQ treating process from the CCA that we're doing today. We will have them all completed by the end of the year and we may continue to have one or two CCA facilities to do industrial and agricultural type applications, but primarily we'll be producing the new copper product. Our outlook for the DIY business is, we've had great growth this year because of Carter Lumber and our increases to the Home Depot. With our Everex product line and our tech trim product line and the other mature products that we have, we think we'll have nice growth and we think the installed sales will add another bullet to our gun, and that will be unique in that marketplace.

The next time we chat, I'll probably talk to you a little bit more about a new service organization that Mike Glenn, our President and Chief Operating Officer, is putting together to better define our relationship with Home Depot, but we're moving very, very nicely. We've got great outlook for DIY. Site-built, let's talk about our performance. We -- you know, even through the first two quarters, it's not where it should be, we're -- we're still digging out of some weather problems, but we have very healthy business and very healthy backlogs. We had good growth for the quarter. Again, not quite as good as we thought it might be, but still pretty strong.

Some of the markets are better than others. The California, Florida, and the northeast are pretty strong markets. You got some weakness in Denver and some of the other areas, but overall there's a pretty good book of business on site-built, and we're excited about our new framing operations, the professional western building professionals and our various framing operations. They're adding nicely to our bottom line and they're making us pretty unique in the marketplace.

We just finished a joint venture with [Norvac], which is a cement framing company in Las Vegas, and this is a R&D project for us. It's a small investment, but what we're finding out as we're building these large multifamily structures, if we can control the flatwork, the cement work, which is the start of the job, then we can control the whole job construction all the way through the final framing. So we're starting this one. We'll be -- we'll be using our own cement framing in our Las Vegas jobs and then if we decide to move it, we'll probably move it into Phoenix and then over to southern California to give us more opportunities there. We know where the -- we know where the market's headed and we will be R&Ding some small investments in things that weren't universal-type arrangements but that we think will give us a strategic advantage.

Manufactured housing, the worst is over. The performance of the industry, we only dropped about 13% over last year's quarter, even though the industry went down 27%. We've picked up substantial market share during this downturn, and we've invested a lot of money in new products. We've got, you know, pop-up dormers and double hinge plates, the easy rider, open [joice] 2000, caper dormer trusses. We've come up with stuff that’s so unique, it puts everybody else in last place. And as I said before, with the Buffett coming in and some new bankers coming back on board, the changes in the Texas laws to go back to being some chattel financing, we look for the manufactured housing industry to have strong growth again over the next 5 years and we're positioned perfectly to enjoy a good portion of that growth.

On the industrial side, we're continuing to grow organically through our industrial sales assault team, headed by Doug [Honholt]. Every quarter, we're up double digits. Next year we’re focusing on about three or four nice acquisitions for the industrial market next year, mid-size acquisitions which we will be starting our negotiations with on the third and fourth quarters and we'll continue to grow that business both the margin and the revenue growth in that has been quite nicely -- has been going quite nicely.

Now, our new initiative, which is building it forward, which was introduced by Mike and his operating and financial group, is a focus on driving the business by two ways. One, increasing our sales by another billion dollars over the next five years. And then also, working on the 10 performance indicators, the key performance indicators, that will make us -- bring us from a really good company to a great company. And we're bringing this all the way through the organization right down to the people that are being hired, the hats, the shirts, the key performance individuals that are being recognized on a weekly and monthly basis, and we look for this to be another nice five-year program for us to grow sales and revenue, keep excitement in the company, and keep the culture strong and going forward.

As far as the annual targets update, after the first quarter we remained optimistic about the future, about the second quarter and beyond we expected to gain some ground that we lost in the first quarter. We did that, and it was a -- it was pretty good, but we had a wait and see approach, to see how strong the second quarter would be. We think we will grow nicely in the third and fourth quarters, but we also decided to refine the top end of our targets for our annual thoughts as we think we always like to be realistic, and we'd rather under-forecast than and over-perform. So that's pretty much it. Again, we appreciate everything that you guys do in following us and pushing our stock and we'll open it up for questions and try to give you a candid and honest answers.

Thank you, sir. If you have a question at this time, please press the 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, if you have a question, please press the 1 key. One moment for questions. And at this time, I am showing no -- oh, we do have a question from Dan Cillie.

Hey, good morning, guys.

Good morning, Dan.

Good morning, Dan.

Yeah, just a couple questions. Do you have any update on the state of the CCA litigation down in Louisiana?

There's an update. It's going nowhere. There's been no legs to any of the litigation. We've been excused from most of it, but as a depot vendor, they still expect us to represent them, so there's been no changes. There's been no -- there's been no class action status granted, and, you know, we think we're fighting the good battle.

Okay. Is it possible to quantify the impact of weather during the second quarter?

No, it's -- that's pretty tough, Dan.

Uh-huh.

You read the newspapers. You know what it was like in the northeast and the Mid Atlantic and the things that happened. It -- all I can say is we could have done better if we'd had a little break in the weather.

Okay. And you made some reference to capacity issues during the quarter?

Yeah. We -- we -- we had to fix some of our systems. We're -- you know, some of our systems aren't up to speed as far as the new computerized situations that we have in other areas, so we're fixing those. But they did cost us some -- some manufacturing volume.

Okay. And let's see. In terms of how -- you know, can you quantify the sales of Everex?

Here's what I could -- here's what I could do. I could tell you that we were granted one market for Home Depot, which was the Midwest, and since that time, with the -- with the sale of the product, we have been awarded the New Jersey market, the Texas market, the Oklahoma market, and our sales for the first six months are about eight or nine million bucks in the product, and we're just getting started. So it's been -- it's been very, very, very strong.

Okay. That's about it. Thanks.

Okay, Dan. Thank you.

Thank you. And our next question is from Ralph Mo rash.

Hey, Ralph.

Good morning. How are you doing?

Good. How are you doing.?

I'm fine. Thank you. Just a couple of questions. First of all, I noticed that inventories were up quite a bit, year-over-year.

Yeah, t here's a couple reasons for that, Ralph. One is the composite products. We have to build -- you know, you're extruding them at a certain rate, so we really have to build inventory over the cold months and the spring months in order to handle the demand for the summer and the fall, so there -- there's some inventory there. That is moving out very rapidly. As a matter of fact, it might -- may be a little bit ahead of schedule.

Also, our inventories are up because of these new TSO arrangements on these six plants, so that's -- you know, six more inventory locations. And then also, with the conversion from ACQ to CCA, we're having to build up some CCA inventories so that when we close these plants down for a couple weeks to convert to ACQ, that we don't take care of -- that we don't have any out of stock problems with our customers. So those are pretty much the three areas.

And you'll see those correct themselves over the next six months. Okay. Would you also contrast your Lowe's sales growth with your Home Depot sales growth?

Let Matt pull that but -- I mean Mike pull that, but we've had growth there. We've had a lot of growth in DIY outside of Home Depot. I think you know we mentioned on the last call that we've been awarded almost an exclusive arrangement with Carter lumber, which is one of the largest independents and our sales are up very strong with them. We're up -- for Lowe's, you mean?

Depot is at 10% for the year-to-date and Lowe's is pretty flat with last year.

Okay. There you got it.

Okay. The -- some of the new products that you're going into Home Depot, the decking products and so on, is there anything that would preclude you from selling them to other stores?

No, other than that the demand is so high from depot, we're -- we're -- we are selling to other stores. We're selling them to Carter, we're selling it to some independents. We just do not have the capacity to take on Lowe's.

Okay. Thanks a lot.

Okay.

Thank you. And our next question is from David Liebowitz.

Congratulations on a great quarter.

Thanks, David.

Thanks, David.

A couple of brief questions. One, the cost of converting the plants out of CCA, how much does that come to this year?

Over the year, it's been about 50 to a hundred thousand bucks per plant, just to change the bearings and to change the wheels, et cetera. Which we've already expensed in operations.

And most of that was incurred last year, David.

Yeah. And the other costs that we'll have is we'll have a week or two where we've got these plants being flushed out and cleaned where we'll lose the -- we'll lose the manufacturing burdens that we would have by treating products. So we've got that all figured in our forecasts.

Understood. Could you share with us, though, what the net amount of that would be on a per-share basis so that when we do our forecasts for next year, we could throw in the incremental gain?

I'll have Mike work on that and some of his people, David. That would be too hard for me to in my head and we'll see what we can come up with, but that might be a tough one.

Okay. Then we'll let it slide by the board then. Second of all, can you talk to us about your steel venture and what that might mean?

We're -- it's another R&D project where we're -- we're doing some commercial work in the southeast on the manufacture of steel roof structures, and we're just starting in on it. We've got one operation that's running it. It's doing pretty good. But it's not a significant -- it's not a significant product line at this point in time.

Okay. And following up on Ralph's prior question about the plastics operation, could you quantify the size of that business and how fast it's growing at the moment?

You mean as -- as an industry?

No.

Or are you just talking about.

Your piece of it.

Oh, double-digit growth through the next five to ten years and it really isn't the plastic, it's the composite. Which is a 50% clean wood flower and a 50% high density polyethylene that's extruded, heated and then brushed so you get a wood finish. And it's -- the growth in it is going to be how much -- the way we look at it is our growth is going to be how fast we can put in extruder machines and how fast we can run the -- you know, how fast we can run the lines. It's a powerful product line. It's so good, I even put it on my own decks and our president put it on his own decks and we got the nicest decks in town.

Is there any game plan that you can outline to us as to how much equipment will be added and how quickly, or what it might mean to your output?

We made huge investments this year in doubling the size of both our Everex plant and our Springfield tech trim plant. We will be -- I would say next year that we would look at 30 to 40 million bucks in sales of those products.

Excellent. Let me say thank you, and again, keep up the good work.

Thank you, David. Appreciate your support.

Thank you. And our next question is from Mark Smith.

Hey, guys. Great quarter. Quick question. Can you talk a little bit about the percentages in the third or fourth quarter of the CCA versus the ACQ wood?

We'll be primarily -- I would -- okay. I'll give you some percentages. We're starting our conversions in about two to four weeks. We'll be converting one at a time. By the end of the third quarter, we'll be 75% CCA, 25% ACQ. By the end of the fourth quarter, we'll be 90% ACQ and we'll probably have a 10% CCA inventory that will leak into next year.

Okay. And what are the relative costs of goods and the margins on those two products?

The cost of goods is the -- the lumber is the same. You got about four times the cost in the chemical, so it's going to be about a hundred dollars a thousand increase to the customer, based on a $400 lumber market, you're talking 20 or 25% increase in sales revenues on the new product line.

Okay. You've been successful in passing that through to the Home Depots of the world.

It's all based on a formula with the chemical cost added to the wood formula, so yeah.

Great. Thank you.

Uh-huh

Thank you and again, ladies and gentlemen, if you would like to ask a question, please press the 1 key. And at this time I am showing no further questions.

Okay. Then we'd just like to thank everybody again for being part of the call and for supporting Universal and we look forward to giving you some good results in the future. Thanks a lot.

Ladies and gentlemen, this concludes today's conference. Thank you for injure participation. You may disconnect at this time. And have a great day.