UFP Industries Inc (UFPI) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Universal Forest Products quarterly call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session; instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded.

I would now like to introduce Sharon Silvers (ph). Ma'am, you may begin.

Good morning and welcome to Universal Forest Products' second-quarter 2005 conference call. This is Sharon Silvers with Fleishman-Hillard. Joining us today are Bill 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 27-A of the Securities Act of 1933, as amended, and Section 21-E of the Securities Exchange Act 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 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 risk 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, Sharon, and thank you all for joining us today on the call. We are pleased by the results of our second quarter, which were marked by solid performance in each of our markets and by once again doing what we say we're going to do. I'm trying to find different ways to tell the story quarter after quarter but fortunately it's the same story of success.

In the second quarter of 2005, we had net sales of 780 million and earnings of 22.8 million, or $1.20 per diluted share. Virtually all of this growth was organically driven, which means we did more and better with our current capabilities and it's in-line with our five-year target to meet our goals through 50% organic growth and 50% in acquisitions.

Next week, we are going to welcome almost 1,000 people to our corporate headquarters to celebrate our 50 years of business. I am pleased to be able to tell them about another great quarter as we celebrate our company and our success.

Now, I will turn the call over to Mike Cole to discuss our financial results for the second quarter of 2005, and then I will get back on with a little of our business strategies. Mike?

Thanks, Bill, and good morning, everyone.

I will start by reviewing our income statement for the quarter. Our total sales increased 5% over last year, primarily due to organic unit sales growth out of existing plants. By market, our sales to the DIY market remained flat this quarter -- (technical difficulty) -- compared to last year as the result of a strategic decision to diversify our customer base by turning down business that did not meet margin requirements. Our sales for the manufactured housing market grew as a result of a 10% increase in units shipped, due to market share gains. We increased our sales of panel goods with Clayton Homes this quarter, and continue to increase our sales to modular home producers. Industry shipments of HUD-code homes remained flat for the quarter based on preliminary numbers.

Our sales to the site-built construction market increased 10%, which was driven by organic growth out of several plants in our Texas region. These plants have executed their strategy to add lumber pack (ph) sales to customers we currently sell components to.

Finally, our sales to the industrial market were up 12%, primarily due to very profitable organic growth out of several plants in our Southeast and west central regions, as we picked up market share. We've added almost 200 new account since this time last year and more than ever before, we've been able to substantially increase our sales with existing accounts as a result of advantages we have on the purchasing and manufacturing side of the business. Due to the strong growth of our site-build manufactured housing and industrial markets, our sales to Depot comprised approximately 24% of our total sales in the first six months of 2005, compared with 28% last year.

Moving down the income statement, our gross profits increased over 9%, (indiscernible) 5% increase in unit sales. Our improved profitability was primarily due to increased sales of value-added products and a downsizing of one of our western framing operations. Our value-added product sales comprised 50% of our sales this quarter, compared to 47% last year.

Selling, General and Administrative expenses increased by approximately 6%, which was slightly above our 5% increase in unit sales. This was due to higher increases in wages, healthcare expenses and incentive compensation tied to operating profits and return on investment.

Moving onto our cash-flow statement, our cash flows from operations improved by almost $58 million compared to last year, primarily due to an increase in our sale of receivables program, a faster receivables cycle due to additional resources and efforts we recently devoted to that area, and a substantial increase in our working capital requirements last year due to a 32% increase in the lumber market from the beginning of the year to June, 2004.

Capital expenditures totaled almost $22 million and we believe we will spend approximately 44 million for the year. We've spent $7.5 million for the assets of Maine Ornamental in June and expect to pay an additional 1 million in July to settle the transaction. Also, right after quarter end, we acquired an additional 25% interest in Shawnlee LLC for approximately $3.5 million. In a separate transaction, Shawnlee acquired the assets and assumed the liabilities of Shepardville and AW Construction for $2 million. Proceeds from the sale of property, plant and equipment came primarily from the sale of our Stockton, California plant in the first quarter. In May, we collected the remaining portion of our insurance receivable totaling approximately 3 million.

A few points I'd like to make about the balance sheet -- first, our total debt at the end of June was 228 million versus 288 million last year as a result of strong cash flows we've generated over the last year. Included in debt was $50 million outstanding on our revolving credit facility, which is entirely comprised of seasonal working capital requirements at this point. We continue to manage our capital structure conservatively, as evidenced by our leverage ratio, which decreased to 37% from 47% a year ago.

That concludes my comments on the financials. Bill?

Thanks a lot, Mike.

Now, I will try to provide you with a business update and then we will take questions. First of all, to take a look at the lumber market, it's essentially flat. It did exactly what we thought it was going t do, and has had little to no impact on selling prices or operating profits for the quarter.

On our four markets, first the DIY market, our sales were flat. We had a small unit declined primarily because we're focusing more of our resources on two markets that represent more opportunity for growth, site-build and industrial. DIY will remain a strong market for us with great customers and relationships but our stronger growth opportunities lie within other markets. You can expect us to get deeper and broader in our product lines for DIY, and you'll be seeing that with the Maine Ornamental acquisition as well as some others that we're working on.

Year-to-date, DIY retail represents 40% of our total business, compared to 43% year-to-date in 2004, right on target. Depot represents 24% of our total business compared to 28% for the same quarter last year, again on target. You should know that we will be working diligently to build some new relationships with Lowe's Corporation.

Our wood alternative products continue to gain popularity. Those include TechTrim, our composite decking and railing line called Latitudes that we distribute through the independent retailers, and Home Depot's Veranda decking products. It's interesting to see how our composite products, using virgin high-density polyethylene, are doing so well and the Trek’s product is faltering as we predicted.

We made a nice acquisition at the beginning of the third quarter that will have an impact on our DIY sales. Maine Ornamental Woodworkers is a leading supplier of decorative caps for fence and deck posts, which are made out of copper, brass, leaded glass and many other unique materials. These products perfectly complement ours, and we're glad to offer them as part of our deck destination systems program.

We've worked with Maine for a long time now as one of their major distributors and know and respect the company and its people. It fits like a glove. This acquisition fits in with our five-year strategic plan. Mike Glenn, our Chief Operating Officer, and myself recently visited China to see the wood processing operations in northern China and the stamping operations in southern China, and we were pleased with what we saw. Should the climate ever change in China, we would be able to move this production to our Durango, Mexico operations with little or no problem.

Under the site-build segment, we are really pleased with the performance in site-build. We continue to grow with our customers. Lenar (ph) was up 56% for the quarter, DR Horton up 76%, Meritage up 330%, Suntech is up 58.7, Bees (ph) are up 28; every one of our major customers that we are having initiatives with, we are growing the business nicely. We have strong organic growth in Texas; we have heavy backlogs; we have efficient plants; and we are really looking for this site-build segment to grow.

Early in the third quarter, we announced the acquisition of another 25% of Shawnlee Construction, which we already own 50%, and agreed to acquire the remaining 25% over the next five years. Shawnlee is the largest framer of multi-family structures in the Massachusetts/New England area. Through this purchase, we also agreed to purchase Shepardville Construction and AW Construction, two large framing companies that are interior framers, installing products like molding, trim, doors, windows, etc. This acquisition adds to our installation capacity – It gives us another outlet for the molding products that we produce at our Durango, Mexico plant and adds exciting new products to our overall product mix.

The industrial segment -- as Mike mentioned, almost 200 new customers since last year. Performance is right on track. It's a very powerful business for us. We're growing with current customers. For example, we tripled our sales to a bedding manufacturer that we supply with bed frame components and more than tripled our sales to a large door manufacturer. We had our first orders from Kiwi Construction, which is one of the largest construction firms in the U.S., where we are supplying concrete form and construction lumber for things like supports and walkways for the Phoenix Airport construction and new construction on Highway I-4 in Florida.

Very strong growth from our plants in the Southwest and Southeast. We expect to see continued growth in this market because we have a lot to offer that others can't. We have a unique buying power -- our engineering and production expertise with our team selling we bring to the table with every sales call, and we are also being able to utilize all the downfall from our other operations to make these industrial and agricultural packaging products.

Good news on the manufactured housing front -- this continues to be a strong, solid business for us. We grew our business with Clayton this quarter by over $4 million and we grew our modular business by another $6 million. The modular segment is particularly healthy with more builders moving to modular construction, the proprietary products that we have that I mentioned to you over the previous quarters, and very, very strong relationships going back into the late '50s.

In summary, this year, we are celebrating our 50th year of business and we are starting the year with a solid performance. We are hitting our aggressive internal targets, we might even be exceeding them, and our goal was to reach 2.65 billion by 2004, which we should easily surpass. We intend to continue to be a good investment for you. We're liking the way the stock is moving recently. In fact, we based our results on the market. We've raised our target net earnings growth and we believe it will be in the 15 to 20% range.

I hope that gives you a good picture of our quarter and our opportunities. The Company and the people at Universal remain committed to our ROI goals. We thank you for your time today, for investment in our company. Now, we will open it up for questions.

(OPERATOR INSTRUCTIONS). Stephen Weiss (ph).

Congratulations on a solid earnings quarter. Your stock has been doing really well. I don't think you guys can do anything wrong at this time, it seems like.

I have a question regarding the buy side. It seems like, on the sell side, you guys have everything in order with a lot of good customer orders for next year. On the buy side, -- a lot of your competitors recently been implementing the new strategic initiatives to reduce our raw material costs by opening up a better line of collaboration or communication with the supplier base. I'm interested if you could provide some color to us on the call today as what you guys are planning on doing to open up a better line of collaboration with the suppliers to reduce raw material cost.

You know, we think we are pretty uniquely positioned with our full-log strategy on buying everything that the mills manufacture. We are the only company in the United States that uses the whole log. We use the low grade for our industrial and agricultural packaging; we use the high tensile strength for our components for site-build; we use the appearance-grade product for our DIY business; and we use the standard grades for manufactured housing.

Our relationship with our vendors is outstanding. We are the largest importer of Brazil and Chilean product; our China cedar operations are going well and our Eastern European operations are well. We have our purchasing people throughout the world constantly sourcing, and we feel very, very good about our competitive advantage on the buy side of the business.

Looking at your economy over the last couple of years, I've been analyzing it; you guys are real focused on quality. How are you guys always making sure you are getting the right quality from your supplier? Are you doing scorecarding of suppliers to make sure all of your suppliers are living up to your expectations?

Yes, we do scorecarding with all of our vendors, and we also do one-time shipment reports unique with them quarterly. The volumes of business they can do with us are based upon how well they keep up the quality, how well they reach their shipment dates, and how well they handle the whole overall business relationship.

(indiscernible) been in a lot of their feedback over the last couple of years, and further into the future as into what you guys planning on doing. Are they receptive? Are they feeling that they're being squeezed? What it in their feedback?

Well, we've treated them as partners. We visit the mills; our (indiscernible) people constantly visit the mills. We have open forums with them; we have vendor weeks, and we are -- we just feel like we have a very solid relationship with our whole vendor base.

Thank you very much. Congratulations on a great quarter.

Cliff Walsh.

Bill, can you repeat your comments about you mentioned something about (indiscernible) decking and the products -- (technical difficulty). Can you repeat that?

Well, on our one-on-one meetings that Mike Cole and I have been doing over the couple of years, we are always pounded with the Trek success story, and I show the differences in our product, in our manufacturing process, and then the other parts of the decking system, which we have very unique products in, and my forecast was that our virgin high-density polyethylene and wood flour (ph) product would surpass that for quality and growth. You know, Treks (ph) is a great company, they've got a really good job but I think that there are some other products on the market that are better.

Okay. In terms of kind of some comments by Treks about maybe a slow start to the decking season, did you experience that throughout the quarter?

We had a slightly slow start because of the early spring but our decking products are sold out. I mean, we couldn't take another order.

Okay, so you are still at full capacity in plant there?

We are probably overcapacity. We have some other opportunities that we're going to have to put in more capacity in order to take them.

Okay, so what kind of timeframe are you looking at for expanding the decking plants?

We will first probably go to another shift before we add any more capital expenditures, but if all the business comes through that we're working on, we will probably have to add some capacity in 2006.

Okay. You also mentioned, in the press release, strong sales of value-added products. Can you maybe talk a little bit about how much of a product mix shift you saw in the quarter?

Value-added sales went from 47% last year to 50% this year. The strength of the industrial market an the site-build market and manufactured housing (indiscernible) are what drove those numbers.

Okay, great.

Cliff, remember too that most of the other products we sell are value-added, though we don't call it that, like pressure-treated lumber, we don't call that a value-added product. So those unique product lines are selling very nicely.

Okay. In terms of your raised outlook for the year, you know, you point to a couple of things in the economy. Is there anything specifically you can point to that was kind of the driver behind that? Was it maybe increased expectations for new starts, or job data or anything, anything in particular?

What's really helping us is we had some difficult issues with some of our framing companies last year. I'm not going to get in any numbers, but we've got those turned around, and those are really helping our numbers.

Okay, great. Thanks so much, guys.

Keith Hughes.

Two questions -- first, when you look at your -- not the DIY but the retail dealers, are you seeing any change in their desire or willingness to take on inventory? Have they cut back any in the quarter? Anything like that going on?

We haven't noticed -- we haven't noticed any cutbacks; it's sort of like business as usual. I don't -- you know, everybody is playing their inventories pretty tight, but you know, I think the buying stream is about the same.

To your comments to your composite decking business, are the profits there close to the Company average, above or below? Where are they right now (indiscernible) you are running full out here in capacity?

The only thing I could mention about that is that the last couple of months have been records for the composite business.

All right, thank you.

Frank Danelle (ph).

I have a question. Just in the long-term strategy (indiscernible) still think is half -- half the growth comes from organically and half from acquisition?

Yes.

About what type of multiples are you now paying for acquisitions? You know, I don't know the difference from site-build to the DIY area. Are they similar or what type of -- you know?

We are staying right in our (indiscernible), which is between 4 and 5 times EBIT. We do sometimes have some earnouts that they can get in addition to that, but we are staying pretty true to our ROI model.

You also made a comment about -- I guess you use the term "lumber pack". Could you just tell me what a lumber pack is?

Yes, there are two different ways to build homes. One is to use all components that are engineered floor system that is set in place, wall panels and roof trusses. There are some roof builders that would rather stick-frame the floor or step-frame the walls and then use trusses. In order to take the entire business from some of the major production builders, we now offer the lumber packs, which is the stick-frame portion of the business, if they don't want to go to wall components.

One of the large contractors are or large builders that you guys cited earlier, like a DR Horton or a Lenar, when they decide to give you the business, in a geographic region, do they subcontract out all that they were doing before or do they keep some of that stuff in-house and subcontract part of it to you?

It's different with each one. Sometimes they do it by subdivision; sometimes they do it by model; sometimes they do it by geographic area. Our strategy is to try to tie up all the business in geographic areas where it's conducive to the transportation costs coming from our facilities, so we know that we are the low-cost player.

You know, I -- there's some companies coming public now that look to be doing similar things to what you're doing.

Yes. You're talking probably about BSF?

Yes, yes.

They are similar, okay, but they are more of a contractor yard. You know, they do everything doors and windows and moldings, installation, drywall. We are very narrow in our product line. We do walls, roofs and floors and lumber packs.

Thanks, that's it.

David Leibowitz.

Good morning. Let me add my congratulations on an excellent quarter. A couple of unrelated issues -- one, on do-it-yourself, if we were to ex-out the business that you walked away from, would do-it-yourself be up this year?

Yes.

Any idea what percentage?

No.

Okay. Second, the way you're talking about capacity, one gets the impression that next year might be a significant jump in CapEx. Is that accurate?

No, we will probably stay true to our -- (multiple speakers).

We are generally in the 40 to 45 range, and I would imagine we will be in that same range next year.

Okay, excellent. Do you have any target in terms of dollar amount spent on acquisitions over the next 18 months?

No, not at this time, David.

Are you close to any transactions as we speak?

None that we can talk about, David. We always have acquisitions in the pipeline, but we don't provide any forward-looking comments on those transactions.

We always had six or eight we're working on, and we announce them when we get them done.

The last question is, at a point in time, the housing bubble or whatever you want to call it is at least going to slow down if not get popped. What is your position going forward? How are you going to cope with that?

We think we are -- and again it's because of our business strategy, but you now, the company that us going public now, BSF or VMHC or those, they are 100% in that new housing market. You know, our business is very balanced through the DIY, the manufactured housing and the industrial business. The industrial business is countercyclical; the manufactured housing business usually gets stronger when the site-built business fades. If they are not building new homes, they're usually fixing their old homes, so the DIY segment stays very powerful in those times. So we think we are perfectly positioned to ride out the storms. You saw us ride out the manufactured housing when you didn't even notice it, and it was the biggest dump in the business since I've been in it. So we have a very firm strategy to be able to move our people resources and our manufacturing resources where the markets are the best.

We also feel that we are still a very small segment of the housing business, in terms of the components that we supply, and we feel that we can be very aggressive and we can hold market share when others lose it.

Very good. Thank you very much.

(OPERATOR INSTRUCTIONS). There are no more questions, sir.

Then we would just like to wish everybody a great healthy summer and thank you very much for your interest in us and your investment in us. We will keep our heads down, shuffling our feet and continue to earn you a good return. Thank you very much.

Thank you, everyone, for participating in today's conference. You may now disconnect all lines. Have a wonderful day.