UFP Industries Inc (UFPI) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Universal Forest Products second-quarter earnings 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. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded and will be available for replay after the conference. I would now like to introduce your host for today's conference, Mr. Jeremy School.

Good morning and welcome to Universal's second-quarter 2004 conference call. This is Jeremy School with Fleischman-Hillard. Joining us today are William Currie, Vice Chairman and CEO and Michael Cole, CFO. Before I turn the call over to Bill Curry, I would like to remind everyone that included in this report are certain forward-looking statements within the meaning of section 27A of the Securities Act of 1933 as amended and section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based on the belief of the Company's management, as well as on assumptions made by and information currently available to the Company at the time 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 uncertainties. These risk factors and additional information are included in the Company's report 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 express written consent of Universal is strictly prohibited. At this time I would like to turn the call over to Bill Curry. Go ahead, Bill.

Thank you Jeremy, and thank all of you for joining us on the call today. It was a good second quarter, a good solid quarter, led primarily by outstanding results in our site-built and industrial markets, and we grew our earnings by over 15 percent from our previous year second-quarter. So that's the good news. Our sales are 743 million for the quarter and 1.2 billion for the year, so we are on track to hit all of our targets there, maybe even a little better.

It was a great quarter, but it wasn't as good as it should have been and there is a few things that we will talk about later on in the call, and I'll just mention them now. One, we lost a very large manufacturing plant in London, Ontario to a fire. We had five new operations we opened up in the first and second quarters of this year, which didn't post a profit yet. We are still getting them geared up to profitability. And we still have some challenges in our multi-family, one of our businesses on the West Coast, our multi-family group -- we still have some challenges there, and we took some significant hits. So we will talk about that a little bit later when I give you a more in-depth overview of our performance.

But I will turn it over to Mike Cole now to discuss our financial results for the second quarter of 2004. Mike.

Thanks Bill and good morning everyone. I will start by reviewing our income statement for the quarter. As you noticed in the press release our total sales increased 34 percent over the last year. We estimate that the higher lumber market and the switch to ACQ increased our sales prices by approximately 23 percent, leaving unit sales up 11 percent for the quarter despite the sale of our interest in Nascor and the fire in Thorndale.

Of the 11 percent unit sales increase we estimate that 7 percent was organic sales growth out of existing plants. Our sales to the DIY market increased 14 percent for the quarter as results of higher lumber and chemical prices. Unit sales declined approximately 7 percent due in part to weather. Also, our sales to Home Depot comprised 31 percent of our total sales for the quarter compared to 37 percent last year, resulting from a decline in unit shift combined with strong growth in our '03 markets.

Our sales to the manufactured housing market increased 49 percent for the quarter primarily due to higher lumber prices and an increase in shipments to modular producers. Industry production Hud code homes was down 4 percent for the quarter. Our sales for the site-built construction market increased 68 percent despite the sale of our interest in Nascor. We had a very strong unit increase in unit sales this quarter that was driven by a combination of acquisitions and organic growth out of several existing plants.

Finally, our sales to the industrial market were up 56 percent for the quarter. We estimate our unit sales growth was over 20 percent for the quarter, representing very profitable organic growth spread over several plants.

Moving down the income statement, our gross profit percentage decreased to 12.5 percent this year from 14.3 percent last year due to the higher level of the lumber market. As you know, we tend to price our products to earn a fixed profit per unit, some periods of high lumber prices our margins declined. In order to take this factor into account we found that a more meaningful analysis as a comparison of our changing growth profit dollars versus our change in unit shift.

Our gross profits increased almost 18 percent in second quarter, exceeding an 11 percent increase in unit shift. One factor contributing to our improved profitability was the effect of a rising lumber market on products in the inventory and whose selling prices are indexed to the lumber market, which would include for example treated lumber.

Selling, general and administrative expenses increased 20 percent for the quarter, which is well above our 11 percent increase in unit sales. Higher SG&A cost this quarter were primarily due to incentive compensation, tied to profitability and return on investment and bad debt expense.

(inaudible) Earnings from operations you can see that we recognized a gain on the sale of real estate of plants we recently closed. As a footnote to that, though, up in SG&A we recognized the loss of $450,000 on the sale of a fractional interest in an airplane. When you take all that into account the amounts basically offset one another.

Overall we are pleased that our net earnings grew at a rate exceeding our unit sales increase, and we're very happy to report that we remain on pace to achieve our growth targets for the year. Now I'll move onto our cash flow statement.

Our cash flow from operations declined by approximately 56 million compared to last year. As you may recall the first and second quarters generally have high seasonal working capital requirements, and as a result our operating cash flow for these periods are usually large negative amounts. However the second quarter of 2003 was the exception simply because of the higher than normal inventory levels we carried at the end of 2002, either weather and opportunistic buying by our purchasing offices.

As you know, we believe our cash cycle is a good metric for determining how well we managed our working capital for the period. Our cash cycle remains flat at 42 days comparing the second quarter of 2004 with 2003. Capital expenditures totaled almost 17 million for the quarter compared to almost 21 million last year. We expect to spend approximately 46 million for the year now, which includes 38 million for our original forecast, plus 8 million to rebuild our plant in Thorndale.

Proceeds from the sale of property, plant and equipment came primarily from the sale of our abandoned Modesto plant that I mentioned earlier and the sale of the fractional interest in the airplane. Business acquisitions consist of amounts paid for inventory, real estate and equipment for our new Dallas and Indianapolis facilities mentioned in the first quarter plus acquiring a 50 percent increase in Shawnlee Construction, a framer serving the multi-family market in the Northeast in the second quarter.

Finally we collected almost $5 million from the sale of our interest in Nascor in January. A couple of points I would like to make about the balance sheet. First, included in debt was about 110 million outstanding on a revolving credit facility, which has a total availability of 168 million after letters of credit. After considering seasonal working capital requirements we expect to have plenty of availability for growth in the future.

Second, we have leverage ratio decreased to 46 percent versus 48 percent a year ago. Primarily due to our sale of receivables program. That concludes my comments and the financial statements. Bill.

Thanks, Mike. Now I'll try to provide you the business update, and then we will take any questions you might have. First thing I like to point out that our people controlled what they could. The major influences on our performance were kind of out of our reach. The lumber market, what it did during the quarter, the weather was horrible, and the fire that destroyed one of our big plants in the heat of the season were pretty devastating.

First of all, in the lumber market, as Mike noted, the market was higher this quarter, which contributed approximately 23 percent of our 35 percent sales increase. The market is starting to recede. The panel market has receded sharply, and we look for even though there will be slightly higher than last year we look for more normal levels of lumber and panel prices by year end.

Under the DIY business our sales were flat, basically. You know its been our strategy to decrease our percentage to one major customer and not by lowering sales, but just by growing the other markets faster. And we were able to do that this quarter. We went from 37 percent down to 31 percent for Home Depot, and we still increased our sales by $24 million. So it's right on track.

The unit sales were also affected by some very poor weather in the Midwest and Texas and parts of the Northeast where a lot of DIY projects were put on hold, and we will probably see those sales come through later. And also the higher cost of the lumber and the panel products did have a deterring effect on DIY sales.

Our composite products are doing very well. Our Everx is in high demand, and we're having good sales with that productline. And more recently our TechTrim product is really starting to catch on and we got some great new customers for it. And next week will be starting on a 24-hour day, seven-day a week, three-shift production schedule on our TechTrim due to the incoming orders. So the composite products look like they are working.

We are also probably get some help with our composite products because of the quality of them versus I think what you have seen in some of the publications on the law suits, the class action suits against Trex who are using reconstituted product and ours is all virgin and pure wood flour. So I think you will see our composite products continue to do very well compared to competitive pressures.

Under the site-built performance 68 percent increase in sales, 50 percent of that being unit sales is huge. We're taking significant market share, and I'm pretty pleased with the performance there. We continue to build and evaluate our framing operation to become more vertically integrated, and provide our customers with turnkey operations. And as we mentioned last quarter we had some significant management challenges with one of our multi-family projects in the West. Year-to-date now we've lost about 10 cents a share. We are correcting that. We replaced the people. We've got a much better handle and knowledge on what we're doing in that business and its starting to become one of our core businesses. So I think you can look for that to get better and for us to get our arms around it like we have the rest of our business segments.

We also decided this year to greenfield and open five new operations. We opened at Indianapolis, in Berlin, New Jersey and Dallas, North Dallas, Texas; in Houston and into Cotton, Mexico and I visited all those operations this quarter. Three of the five are on track. Two of them need a little more work, and we might have to change some personnel. I just got back from the Tecate, Mexico operation and that's going to be a real winner for us. We have a much different labor percentage there than we have in Southern California, and we also have the opportunity to bring wood in from Canada with no duty and then move it back into the U.S. as a finished product. So look for that Tecati thing to add favorably to our numbers.

The manufactured housing -- you heard Mike -- the HUD homes were down 4 percent for the quarter and production, yet our sales were up 49 percent, 13 or 15 percent in units and that's because we developed those new modular products that we told you about, the double hinge and the sidestep plate and the open joist modular product and the caper truss, and they are really adding to our sales in making that a very powerful business for us again. Our new products was a wise investment when the market was down because they are paying dividends now.

Industrial, again pretty outstanding. 56 percent increase in sales, 20, almost 25 of that in units. I always mentioned Doug Honald (ph) in his sales/industrial assault team. They just continue to take market share. We've got the big Kabota (ph) account this quarter. We got a couple of other really nice accounts and continue to watch that grow for us and grow internally because we don't have to make much investment in that. So we're going to really push hard in that.

Our engineering team is building better and more efficient packaging solutions. Our buying power is giving us a tremendous advantage over the smaller players in the mom-and-pops, and we don't have any downfall at any of our plants. It is all being used in the industrial and agricultural packaging deal. So it's making all of our other product lines more profitable.

All in all it was a strong quarter, and again we controlled what we could to hit our internal targets. The lumber market is always a challenge, but we have a very astute purchasing teams that will help us negotiate through that. The fire at our Thorndale plant couldn't have happened at a worse time. At the very beginning of the building season when we had a huge backlog, a few months backlog. The good news is that none of our employees were hurt. The bad news is that the business quoted from Thorndale was quoted at Canadian labor rates. The Canadian exchange rate and with no lumber surcharge. So when we had to move the production to plants in the U.S. to take care of our customers, we moved them to White Pigeon, Michigan, Lodi, Ohio and Indianapolis. They had a serious negative impact on our operating profits at all those operations.

We also lost the second quarter profits from Thorndale, which in fact were down over 750,000 bucks from 2003 second quarter. And that doesn't count the impact of the profitability problems that it caused for White Pigeon, Lodi (inaudible) and Indianapolis. Each of these plants was forced to replace profitable business with the Thorndale production so that it would hurt profits in the short run but we took care of our major customers especially Pulte during their busy building season and we believe that was the right thing to do and that it would be important for our long-term business alliance.

We are currently in the process of planning and rebuilding the Thorndale plant, and we will be able to replace what was an aging plant with a newer more efficient one, but of course at a higher cost. We expect to be in the roof production by the end of August or early September and then wall panels, floors and the open joists will follow.

Despite these setbacks we delivered some good results. We were able to hit our targets and I'm proud of what the people of Universal did. It is a very good, functioning team. I also thank you for your time today and will now open it up for questions.

(OPERATOR INSTRUCTIONS) Frank Frith. (ph)

I had a few questions. One was the SG&A up 10 million dollars. Looking forward where should that be? Would these kind of onetime incentive compensation in the second quarter, or will those be going forward the rest of the year and into next year?

To set a target we kind of looked for SG&A to go up pretty well in line with unit sales. So that didn't happen this quarter, but going forward I would expect that to be a good target.

Could you guys talk a little bit more about the framing operations and I guess you said I know it lost like 5 cents or something in the first quarter, it looks like another 5 or so, maybe a little less this quarter. Could you just go over exactly what's going on there? How many framing operations do you have? Which ones are profitable? I just forget.

We have one in the Northeast, which is very profitable. We have one in Colorado, which is profitable. We have two in the Las Vegas area, whichever are both profitable. And we have one which was out of Phoenix, we moved to Southern California and replaced all the personnel because projects were bid improperly. They did not follow systems, and then the actual build did not come in line with what the projections were. So as you can well imagine, we don't stand for that too well. So we put in all new personnel. We put in much better systems, senior management is involved with everything that is going on. If we don't have the proper management and the proper staff, we aren't doing the jobs. And we are just going to start making it run like a good, conservative Midwest business again, not the way that it was done in the past.

And I can assure you that we have our arms around it. We think we have accrued for everything on some of the bad jobs that were out there, and the last six or eight that we've done and we've done properly, we are making nice profits on all of them. So I think the worst is behind us on this. As a matter-of-fact I can almost guarantee that it is, and I think you'll see that be a very good profitable part of our business.

And the customers again, are the bigger homebuilders, is that who?

No. These are all big multi-family jobs. Government jobs, military jobs, university jobs, those kinds of things.

Great. Keep up the good work. Thank you.

(OPERATOR INSTRUCTIONS) Greg Matosko (ph).

You mentioned the 750,000 lower profit on the operation because you had the fire in Ontario. Could you give us a sense of just total kind of with the movement of the jobs to other plants, et cetera, what was the all in cost for the Ontario problems?

We've been trying to find that out ourselves, and we can't get to the bottom of it. The only thing I can tell you is that it is significant. You know, it's our labor rates in Canada are about the same as they are in the U.S., but there is a 30 percent difference in the currency valuation. So that is a tremendous hit. And then the there is no duty on anything that we make in Canada and send into the U.S. as a finished product. And that duty is 29 percent. So as you can well imagine, that had a significant part of it. But we don't have it segregated because we have other businesses that are in there. The margins move around. All I can tell you is that it was significant, and.

Those numbers are basically buried in the U.S. plants you picked up that business, and it is very difficult to try to pull those out.

Okay, but then look at it this way. Given all you've done so far, when would you expect to kind of those more costly jobs to become go through the U.S. operations? And then to have -- you said basically Ontario would probably be back and running what, by the fourth quarter?

Yes, I would say it is going to hurt us again for the third quarter, but for the fourth quarter we should be back on track.

And then are all those jobs through those higher cost jobs? Were there still more jobs that are going to be run in the second, the third quarter?

The major customer that was being serviced out of there was Pulte and it's an ongoing deal, and it's a contract that is tied in for longer periods of time, so it will be just moving back to the Ontario plant and out of the U.S. plants.

I see, so there will be some ongoing higher costs for Pulte in the third quarter, as well then?

Yes.

Okay, all right. And then you said the Phoenix was moved to Southern California.

We closed the operation in Phoenix. We put it under a Universal veteran, and we got rid of all the staff, and we just cleaned house and started all over again because we like the business, but we didn't like the people, and the businesses is all about people.

Yes, and you mentioned that last quarter I believe.

Yes, sir, I believe I did.

And with regard to that, you said some of the new jobs were profitable now. You expect that to be profitable in the third quarter?

I do.

So better than breakeven then?

Yes, sir.

Then you expect the sort of unit growth on the SG&A rate for the SG&A to be on track in the third quarter?

That is more of a long-term target. It's something we look for for the year. I wouldn't rely on that quarter-to-quarter.

Okay, but is the incentives on profitability, have they come through now? You expect more incentives, profit incentives in the third and fourth quarter?

Sure, we are returning those throughout the year based on the profitability and return on investment at a particular point in time. So you know you can get fluctuations in SG&A from quarter to quarter, but that is kind of a long-term target for us is to hold those costs in line with our growth.

I hope you exceed them and have a lot of incentives in the third and fourth quarter.

Thank you.

(OPERATOR INSTRUCTIONS) Angel Chen.

Good morning. I would just like some color if you can provide it on some of the outstanding CCA litigations regarding -- involving your customer.

There has been no class action certified. The most troublesome suit which was in Colorado was defeated. We have a couple little ones left, but it is definitely the highlight on CCA is definitely moving away, and we don't feel at this point in time that we have anything out there that we don't have our arms around.

There is very little new that has popped up in the last quarter, Angel. The best place to look for a detailed description is through our quarterly filings.

All right. Thanks.

I show no further questions at this time.

Okay, then we'd like to thank you all again for being part of our conference call. And we've got some work to do, so we are going to go do it. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect.