UFP Industries Inc (UFPI) 2004 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Universal Forest Products 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). I would now like to introduce your host for today's conference, Mr. Jeremy Skule from Fleishman Hillard. Sir, you may begin.

Good morning, and welcome to Universal's third quarter 2004 conference call. This is Jeremy Skule with Fleishman Hillard. Joining us today are William Currie, Vice Chairman and CEO; and Michael Cole, CFO.

Before I turn the call over to Bill Currie, 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 the 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 uncertainty. These risks, 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 express 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, Jeremy. Good morning everyone. Welcome to our conference call, and thank you for taking times out of your busy lives to hear what is going on in our world.

I'm proud to say that once again we had a good, strong quarter. When our net earnings increase by 20 percent, everybody is usually pleased. So we are definitely on that side of it.

We closed the quarter with nearly 710 million in sales. Our year-to-date sales now are at 1.9 billion, which is the total we had for the whole year last year. Two of our markets had tremendous growth -- a 74 percent increase in site-built construction, a 51 percent increase in industrial products, and manufactured housing also had a strong rebound. The only market that we suffered on some unit sales was the DIY market, and we will talk a little bit more about that later on.

You know, it is all about hard work and it is all about execution. And our first-rate sales and production teams, our management team, our focus on our systems -- you know, we again delivered strong revenues and earnings. And you have got to be proud to be part of a Company like that.

I look forward to giving you a little more in-depth overview of our performance. But first, I would like to have Mike Cole go through the financial results and let you know where we are for the third quarter and year-to-date. 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 32 percent over last year. We estimate that the higher lumber market and the switch to ACQ increased our sales prices by approximately 21 percent. Unit sales were up 11 percent for the quarter, despite the sale of our interest in Nascor and loss of our plant in Thorndale. Of the 11 percent unit sales increase, we estimate that 5 percent was organic sales growth out of existing plants.

By market, our sales to the DIY market increased 7 percent for the quarter as a result of higher lumber and chemical prices. Unit sales declined approximately 10 percent, which was likely due to a softening of demand resulting from higher lumber and preservative costs that were passed along to consumers. In addition, our sales to Home Depot comprised 24 percent of our total sales compared to 30 percent last year, resulting from a decline in units shipped combined with a strong growth in our other 3 markets.

Our sales to the manufactured housing market increased 36 percent for the quarter, primarily due to higher lumber prices and an increase in shipments to modular producers. Preliminary numbers suggest that industry production for HUD code homes was down again for the quarter.

Our sales to the site-built construction market increased 74 percent for the quarter, despite the sale of our interest in Nascor. We had a very strong increase in unit sales this quarter that was driven by a combination of acquisitions and organic growth out of several existing plants, particularly those in our Southern California and Colorado regions.

Finally, our sales to the industrial market were up 51 percent for the quarter. We estimate that our unit sales growth was approximately 29 percent. This represented very profitable organic growth spread over all our regions as we continue to take market share.

Moving down the income statement, our gross profit percentage decreased to 11.8 percent this year from 13.5 percent last year due to the higher level of the lumber market this year. As you know, we try to price our products so that lumber costs are passed through and we earn a fixed profit per unit. So in periods of high lumber prices, our margins decline. In order to take this factor into account, we found that a more meaningful analysis is comparison of change in gross profit dollars versus our change in units shipped.

Our gross profits increased 15 percent this quarter, exceeding our 11 percent unit sales increase. Our improved profitability was primarily driven by our sales to the industrial market.

Selling, general and administrative expenses increased 13 percent for the quarter, which was above our 11 percent increase in unit sales. Higher SG&A costs this quarter were primarily due to incentive compensation tied to increased profitability and a higher return on investments this year.

Overall, we are pleased our net earnings continue to grow at a rate exceeding our unit sales increase. As a result, we have increased our annual EPS target for 2004 to a range of 12 to 15 percent from our previous range of 10 to 14.

Now I will move on to our cash-flow statement. Our cash flow from operations declined by over $81 million compared to last year due to three factors. First, we carried higher-and-normal inventory levels at the end of 2002 due to opportunistic lumber buying. This resulted in higher-than-normal cash flows in 2003. Second, we did not have the sale of receivables prior to quarter-end in 2004 as we did in September of 2003 which, again, increased our 2003 cash flow. And lastly, our growth in units shipped in the higher lumber market commanded greater investment in our working capital.

As you know, we believe our cash cycle is a good metric for determining how well we have managed our working capital for the period. Our cash cycle increased to 44 days from 41 days last year, primarily due to a longer receivables cycle. Our receivables cycle increased due to a greater percentage of our sales going to the site-built and industrial markets, which have longer payment terms.

Capital expenditures totaled over 25 million for the quarter, compared to over 33 million last year. We expect to spend approximately 47 million for the year, which includes an extra $8 million over our original forecast to rebuild our (ph) plant in Thorndale. The cost of rebuilding the plant will be offset to some extent by insurance proceeds we continue to collect over the balance of the year.

Business acquisitions consist of amounts paid for inventory, real estate, and equipment for our new Dallas -- Indianapolis facilities in the first quarter, plus acquiring an interest in Shawnlee Construction, a framer serving the multi-family market in the Northeast, in the second quarter.

A couple of points I would like to make about the balance sheet -- first, our total debt at the end of September was 248 million versus 203 million last year. The increase was due to the fact that we did not have receivables program this September as I previously mentioned, and we had a greater investment in working capital due to growth in the higher (ph) lumber market.

Second, our leverage ratio increased to 42 percent from 40 percent a year ago, entirely due to the sale of receivables that occurred in September of 2003.

That concludes my comments on the financial statements. Bill?

Thanks, Mike. Let's talk about some of the things that happened during this quarter. First, the lumber market was a very volatile market. We saw $100, 1000 over last year's spruce numbers. And so, as Mike told you, it had to do for about 21 percent of our net sales increase.

Now, we have seen the highs for the year. The market is starting to mitigate. The panel (ph) market is already below last year's levels. And we see pretty much a downward trend for the rest of the year, with demand staying about equal. So for the fourth-quarter, we are not going to have much help or hindrance from the lumber market.

The DIY performance -- our sales were up 7 percent. The unit sales were down. There's reasons for that. The lumber costs are higher, and then the new chemical -- the ACQ chemical -- people building treated decks or treated fences or whatever this year, there are 10 to 25 percent higher costs. So it has stopped some demand.

Also, we are seeing -- you know, Home Depot has different margin expectations than they used to have on some of their commodity-type items. So the unit sales going to them are down a little bit, also.

The hurricanes -- everybody thinks the hurricanes are good for business. Well, long-term, they are. But short-term, they shut down all the building permits. All the insurance companies have to come in and determine what the losses are. And basically, it really puts a stop on most major construction going on down there. A lot of panels are sent in prior to the storm. But after then, it is a slow rebuild process. So that will take some time before it adds value to us.

Our Depot sales are down to 24 percent of total sales. Last year, they were 30 percent. You know our strategy is to get them below 20 percent. We love the customer, and we love the business we do with them. But we want to maintain the balance that we do in everything else. And we want to keep moving that down to 20 percent by growing our other businesses faster. And that is what we were able to do this quarter and this year. We are growing our other businesses faster.

Our composite products continue to do well. Our EverX composite decking product and our TechTrim polymer trim product continue to see strong demand. You'll see us re-launching EverX as a new product called Latitudes. We have done a lot of work in making the product the premium product on the market. We have put a lot of design into the railing systems. And Latitudes will be a premium composite decking going through distribution. And we have developed a marketing campaign that capitalizes on its superior look and superior performance. So don't be too surprised if you see our Latitudes product in a lot of smaller retail independent yards.

On the site-built performance, you know, what can you say -- up 74 percent, 53 percent of that in unit sales. We are going on all cylinders. We are capturing market share. I told you, even though there were some markets were sales are starting to soften a little bit, our ability to take market share, be the most competitive player on the block, and to switch them from stick building to component building is going to bode very well in our long-term plans.

Our framing operations are gaining strength. We fixed most of the problems. We are really pleased by one in the Northeast. We have got very long backlogs and high-quality products and good operating margins. And we are continuing to seek and evaluate other opportunities for framing. We think it will end up being another major segment in our business, and we do have a couple of operations that we are looking at.

We had very strong performance from our plant in Southern California. That is in Fontana. It is the largest truss plant in the world. We actually had some weeks during the third quarter where we had over 2 million in sales for one week of roof trusses. So we have got some good things going out there.

Our 5 new operations are hitting on all cylinders, except the one in Houston, where we still are not profitable. The rest of them are all right on track, and we are quite pleased with our ability to manage those.

Let's talk about the new Thorndale plant. As you know, that wreaked havoc on our numbers for the second and third quarters. We had to take all the Canadian priced business into the U.S. So not only did we lose all the profits from the Thorndale plant, we were shoving unprofitable work on 3 or 4 of our other plants. And in record time, we got the new plan up. We are now running full production in trusses. By the end of the year, we will have our Open Joist production, our war pick (ph) panel production, back online. And we will have that as a profitable operation going forward.

So best of all, up in our Thorndale group, we have all of our employees back to work. And the town is vibrant again.

Manufactured housing -- we have been talking to you about our new products -- you know, our Open Joist 2000 floor system, our double-hinged truss, our pop-up dormers, our sidestep plates -- and these things are really coming into play. The market was down a few percent for the quarter, and our sales were -- you know, they were up huge -- 19 percent in unit sales increase up in a market that was still very soft. And it is all about new products, and it is all about new systems, and it is all about blocking and tackling.

We look forward to continued growth in this market. We see it rebounding stronger, and we see the product of choice being the modular product that has actually put on a land-home package, and is financed conventionally.

Our industrial performance is what is really driving the business. It is everywhere, and it is growing everywhere, and it is becoming a very important segment. Doug Honholt, the Executive Vice President of our sales assault team, our industrial sales assault team, continues to amaze all of us in his ability to crack market share and to grow business -- 52 percent increase in sales.

There is a lot we bring to this market. You know, our buying power gives us leverage for our customers. Our integrated sales teams, including engineers and production managers, are unbeatable. And vast amounts of available downfall that we have from our other processes are going into this industrial market and giving us very powerful operating margins.

So in summary, all in all, it was a strong quarter. We are still going to -- head down, shuffle our feet and work through our plan. That sounds pleasant. We are hitting our aggressive internal targets. Our goal is to reach 2.65 billion in sales by 2007. And we are well on our way. We are keeping our eyes on opportunities in each of these markets. We will probably be doing some announcing before the year is up on some acquisitions.

In the meantime, we are going to stay focused on our business. We are going to block and tackle, work hard, and make sure that we continue to be a good investment for our shareholders. Mike Cole and I have done a lot of traveling through the third-quarter talking to new folks about the quality of our Company, the balance of our business, and where we are going to take it forward. And as you see, we are having strong gains in our shares also.

So thanks for all you do for us. Thanks for your time today, and we will open it up for questions.

(OPERATOR INSTRUCTIONS) Kevin Burke.

Great quarter, guys. Do you think -- my first question -- do you think you are going to be able to recoup some of those lost sales in the DIY in the fourth quarter? Or do you think the end of the building season is going to kind of mitigate that?

I think -- if you watched our marketing campaign, you saw where we are taking this. You are going to see some increases in DIY next year. Probably this year, the table has already been set. We are probably continuing on at the same levels we are at now through the end of the year. But we are putting some very strong press on for some new independent business for next year, and on our composite products some new two-step distribution which will get into the hands of a lot of the smaller players. So I think you will see some unit sales increase next year. But this year, it will be same as it is now.

Got you. Can you elaborate on maybe some of the new products you are seeing, particularly for modular housing?

We patented a product called the double-hinge. And what we can now do in the factory -- we can build the two-foot overhang that you don't see on most manufactured housing, because they can't ship it down the road. It is too wide. So now you can hinge once, hinge twice, hinge your overhang back up on the roof; hinge your third section of your roof system down. So now, you can give a 12-12 page pitch appeal instead of the 3-12 pitch you see on most manufactured housing.

We have dormers already built right into the roof cavity, so when you pick up the trusses, you have got the conventional-looking dormers. The Open Joist system in the floor allows the plumbing and the air-conditioning, the heating and the wiring to run directly through the floor. So when you set it on the foundation, you have got a beautiful lower-level with no ductwork, or no pipes.

And companies are recognizing this as real value. And it is giving the modular manufacturers a real conventional look. So you are seeing the site-built guys going to more components -- roof systems, wall panels, floor systems. And you are seeing the modular manufacturers replicate those. And now the two types of housing are converging. And in the future, the modular -- the housing and the production builder's home will look pretty much the same.

All right. Lastly, I'll hop back in the queue here. The cost of goods sold -- looked like you were up about 170 basis points versus last year. I am just wondering, outside of lumber prices, what are some of the other pressures you are feeling there?

Mike?

Cost of goods sold is basically up and down due to lumber prices and chemical costs.

Okay. I just didn't know if you are experiencing anything in terms of transportation costs or --

Somewhat, yes.

You are still having trouble getting Brazilian wood out, due to the ships? (multiple speakers)

We are back on track with that. We have had our Brazilian friends in to see us. We have had the major shipping lines in, especially Gearbulk. And we've got our commitments for next year. As a matter-of-fact, we are way ahead of where we were last year on making sure we don't have those hiccups this year.

All right. Real quick, lastly -- you talk about some acquisitions coming up potentially. Are they in any specific segment?

Right now, we are looking at them in all four segments. And they are -- you can't promise anything until you get it done. But there are some that are looking like they might make a lot of sense for us.

Richard Yamarone (ph).

Just from the supply-side, how severe have the hurricanes been on production? I noticed you have a number of facilities in the Appalachians which spent a good time underwater, not only in September but certainly in August. I just wanted to know -- were there any production cuts or loss of work days?

Yes. We lost some production in the Carolinas. We lost some production in Florida. You know, our Florida plant -- our Auburndale plant got whacked pretty good by the last one -- I guess that was what, Jeanne? And we were down pretty much most of the week.

Also, it is having an effect on our DIY sales. When it is wet, wet, wet, and rain, rain, rain, rain, they don't build a lot of decks. So I think that has something to do with the unit sales from the DIY section.

And from a more macro perspective, what is your outlook for the U.S. economy and maybe into the housing industry and -- again, from the economic perspective for the rest of 2004 and into 2005?

You know, we kind of try to look at our own plan as macro. You know, I think housing starts could mitigate a little bit. I don't think we are worried about that. I think you're going to see manufactured housing blossom. I think you are going to see the industrial market continue to have opportunities for us.

And you know, the DIY business -- we are putting the pedal down on increasing market share for next year. And how we are going to go about doing it -- I think we have a good plan. So we are kind of bullish on where we think we will be in 2005 and the rest of 2004.

Jamie Wyland. (ph)

Just a couple of questions -- first, I wondered if you could talk about how you handled the volatility in wood prices and how frequently you are able to raise or lower prices in each of your markets?

The real volatile things -- the real volatile products, which are 2x4 through 2x12, especially in pressure-treated where you are buying it 30, 60, 90 days before you actually get it treated and out to market -- that is where you can take a butt whipping. And what we do on that most of the time is we have vendor-managed programs with our large vendors -- International Paper, Weyerhaeuser, Canadian Forest Products -- and they put the product on the ground at our plants. We do what we want to do with it. When we ship it to the customer, we price it back to the mill. So basically, they own the market risk. We don't.

On most of our other products in our other markets, we price every 30 days. Or if we price for a longer period than that, we will try to cover the products on a longer period.

In the DIY market, given the change in prices, can you talk about the spread between wood decking and the alternative markets and how much it was in 2004? And what you think the difference will be in 2005? And how are the market shares changing in that area?

Okay. It's two to three times the price of a wood deck -- the composite decking. And it is going to continue to take market share as long as the petrochemical fuels, the oils and stuff, don't keep going up, because they are direct byproducts of that. So you are going to see -- this next year, you are probably going to see lumber prices a little less steep. And you are probably going to see the cost of the composite move up some because of the raw materials used to manufacture them.

There is no question that the no splinters, the color that stays fairly true, the ease of maintenance and cleaning, is giving some market share. And we look forward to grow 10 to 12 percent a year for the next 10 years.

(OPERATOR INSTRUCTIONS) I am showing no questions at this time, sir.

Okay, then we would like to once again think all of our listeners and our shareholders. And rest assured that we will be working hard to make you proud of us. Thank you very much.

Ladies and gentlemen, this can Thank you for participating in today's conference. This concludes the program. You may all disconnect.