UFP Industries Inc (UFPI) 2005 Q3 法說會逐字稿

Welcome to the Universal Forest Products earnings call. At this time all participants are in 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. I would now like to turn the conference over to your host, Mr. Jeremy Skule.

Welcome to Universal Forest Products' third-quarter 2005 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 Curry, I'd 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 beliefs 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 reports on forms 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 express written consent of Universal is strictly prohibited. Universal Forest Products is grateful for the time you're taking to join them on this call and for your interest in the Company. If at the end of the call you have questions the Company requests that you identify yourself by name and by the company you represent or, if you are an individual investor, to indicate that as well. At this time I'd like to turn the call over to Bill Curry. Go ahead, Bill.

Thank you, Jeremy, and thank you all for joining us for the third-quarter conference call. We kicked a little ass in the third quarter and we're pleased by the results of this quarter or because it underscores the importance of continuous improvement and due in part to our focus on doing what we do better every day.

We were able to improve the profitability and performance of plants we added last year that took awhile to get up to speed and some other plants that simply were under performing. Our people also have been keenly focused on being innovative on the job thanks to a reporting reports program instituted by our Chief Operating Officer, Mike Glenn. And our product mix continues to demonstrate its strength by helping us meet our goals for profitability.

Thanks in large part to each of these factors are net earnings were up more than 31% and our diluted earnings per share were $1, beating our own internal targets. Before I talk more about our business segments and a very promising outlook, I'll turn the call over to Mike Cole to discuss our financial results for the third-quarter of 2005. Mike?

Thanks, Bill, and good morning, everyone. I'll start by reviewing our income statement for the quarter. Our total sales increased 1.7% over last year due to unit sales growth. Although there was volatility in the lumber market for different species, lumber prices had very little effect on our overall selling prices and sales dollars.

By market our sales to the DIY market decreased almost 1% this quarter compared to last year as a result of an 8% decline in units shipped offset by higher selling prices due to the lumber market for selling yellow pine. As you may recall from previous quarters, our unit shipments are down primarily as a result of a decision to diversify our customer base by turning down business that did not meet margin requirements at the beginning of the year.

Our sales to the manufactured housing market decreased by 1.5% as a result of a 5% decline in selling prices due to the lumber market for spruce offset by an increase in units shipped to modular home producers. Our sales to the site built construction market increased 4.8% as a result of the 7% increase in units shipped offset by a slight decline in selling prices. Our acquisition of Shepherdsville and AW Construction contributed approximately 2% to our unit sales growth.

Finally, our sales to the industrial market were up 5.7% primarily due to a 12% increase in units shipped offset by a decline in selling prices due to the lumber market. Our unit sales increase represents very profitable organic growth out of several plants in our Southwest and Southeast regions as we've picked up market share. We've added almost 1000 new accounts since this time last year.

Moving down the income statement, our gross profits increased over 18% exceeding our 2% increase in unit sales. Factors contributing to our improved profitability include -- improved profitability on sales of engineered wood component sold to the site built market due in part to declining lumber prices throughout the quarter. As you may recall, selling prices of product sold to the site built market are set in advance of cost.

Production cost efficiencies we've been able to achieve in certain areas; a favorable change in product mix in our sales to the manufactured housing market, our sales of lower margin components used in HUD code homes has declined while our sales of higher margin components used in modular housing have increased. Improved results on a handful of under performing operations, growth of our industrial business and we improved our overall ratio of value added sales to 53% this quarter compared to 50% a year ago.

Selling, general and administrative expenses increased by approximately 17% which is above our 2% increasing in unit sales. This is primarily due to increases in wages and healthcare expenses, certain taxes, bad debt expenses, incentive compensation tied to operating profit and return on investment. Increased wages was primarily due to our site built business which requires higher SG&A costs.

Moving on to our cash-flow statement, our cash flows from operations improved by $73.4 million compared to last year. This was primarily due to a 28% increase in earnings, an increase in our sale of receivables program, small improvements in our receivables and payable cycles and a substantial increase in our working capital requirements last year due to a 27% increase in the lumber market from the beginning of the year to September 2004.

Year-to-date capital expenditures totaled approximately $32 million and we believe that we're on pace to spend approximately 44 million for the year. Under acquisitions we spent $8.5 million for the assets of Maine Ornamental, 3.5 million for an additional 25% interest in Shawnlee Construction, and $2 million for the net assets of Shepherdsville and AW Construction.

A few points I'd like to make about the balance sheet. First, our total debt at the end of September was 191 million versus 249 million last year. Included in long-term debt we only had $13 million outstanding on our revolving credit facility. And our leverage ratio sits at 31%, down from 42% a year ago. Needless to say, we have plenty of untapped debt capacity to support our future growth. That concludes my comments on the financial statements. Bill?

Thanks, Mike. Now let's give you a little business update about what we're seeing. First of all, at the DIY performance an 8% decrease in unit sales, that is purely the commodity treated lumber that we gave up on contracts last year that we didn't like the sale price. It didn't meet our margin expectations. We are also focused on our two growing markets which represent the opportunities that are available for us in site built and industrial and we've spent a lot of time and money there.

This focus allows us to achieve a better balance among our markets and better operating margins. Year-to-date DIY/retail represents 39.5% of our total bill compared to over 42% last year in 2004. Home Depot represented 23.8% of our total business for the quarter compared to 26.3 same quarter last year.

Now looking forward on our 2006 DIY business we are being very aggressive and we're evaluating expanded opportunities with our big-box customers as well as a growing number of new opportunities with independent dealers. We look forward to growth in the DIY segment of our business for 2006.

Site built performance -- we're really pleased with where we are there, especially had strong performances in some of our regions, the mid Atlantic, Texas, California and the Northeast. We saw a number of our underperforming operations improve significantly during the quarter and we also have Thorndale up and running this year which was a problem or us in '04. Our relationships with the large production builders continue to grow as their needs for a national supplier print deepens and as they continue to turn to the engineered wood products that we manufacture. And our turnkey business continues to gain strength in most markets.

On the industrial side, again a 12% increase in units; this continues to be a powerful business for Universal. We're not only growing with our current customers, but we also had strong organic growth in a few of our markets for the quarter. We continue to add new customers because this market is highly fragmented and represents significant opportunity with low investments for Universal.

Manufactured housing -- again a 1.5% decrease in units, but overall better operating margins because as HUD units declined the modular business saw an increase which represents better margins for us. We had some FEMA-related orders in the third quarter in the wake of the hurricanes, but don't expect to see the impact of these orders until the next quarter and we are seeing that impact now.

Under the topic of hurricanes, many people ask us about their impact on our business. First of all, we're fortunate not to have any operations or any of our people in the path of hurricane Katrina so our production was not impacted. As with any hurricane or national disaster there's an extended period of cleanup and insurance assessment. So the construction business won't pick up in that region for a while other than temporary housing. We are supplying some manufactured housing customers with material for large FEMA orders for temporary structures and expect that work to continue and grow through 2006.

We also expect that other manufactured housing products will become popular as that region and its recovery takes place. We have no site built plans currently in the Louisiana area, so we don't currently expect to see a significant impact to our site built sales. We do have dormant plants in Mississippi and Tennessee and we are evaluating whether we want to open some additional capacity.

As far as hurricane Rita goes, we had some very minor damage to our plants in New Waverly and Silsbee, Texas. We lost production for a few days in Silsbee and New Waverly and in Houston, but everything was up and running by Monday and one of the plants had to run on a portable generator, but it turned the month with a profit. So we're pleased that we were able to get through that without any big issues. More importantly, no one was hurt. We expect that we'll see some increase in business in the rebuild after hurricane Rita because we do have plants in the area that supplied builders.

Summary for the quarter, this quarter was about the impact of continuous improvement, about the strength of this Company and everybody working and pulling together for the same goal. It's also a testimony to the importance of being innovative on the job day in and day out. And since last fall when we started our innovation calls, which are mandatory and done every week, we've been able to save millions of dollars in our operations with new and better ways to do things.

The quarter was also about the strength of our product mix. We continue to hit our aggressive internal targets. Remember, our goal was to reach 2.65 billion by 2007, increase our working capital efficiency by 10% and increase our returns by 33.3%. It wouldn't surprise me a bit to see us make it two years early and have accomplished that goal at the end of 2005. Based on results and on the market we've again raised our target for net earnings growth and believe it will be 22 to 27% for the total year. I thank you for your time today and now I'll open it up for questions.

(OPERATOR INSTRUCTIONS). Cliff Walsh.

Good morning, everyone. Can you speak a little bit about acquisitions? You mentioned that you hadn't made as many as you thought you would. Has the pipeline thinned out at all or is there possibly maybe disconnect in terms of valuation?

We have worked a little harder because the expectations for valuations are higher. We do have a handful of good acquisitions that we're in one stage or the other close to completing. And we're still aggressively working on that and I think you'll see some good results.

Okay. And in terms of your guidance for the year, it seems to suggest a pretty wide range for the fourth quarter. Can you speak to that a little bit?

Yes. It is a wide range for the fourth quarter, but the fourth quarter can be subject to weather and other things. It does provide some upside from last year and it does provide a little downside as well.

Okay. That's it for me. Thank you.

Cliff, we're one of those companies that likes to under forecast and over perform. So you might have a little of that in there also.

Steve Chercover.

I was wondering if you could give us any early insight into 2006 in terms of your growth objectives and targets.

We have our 2007 billing and forward goals that are out there. With respect to being specific on '06, what we'll do is after we complete the '05 year we'll express our targets for '06 at the end of the year.

Fair enough. And if you continue to find acquisition opportunities difficult to capitalize on, would you revert back towards internal growth, greenfield expansion perhaps?

Greenfield expansion is a part of our capital expenditure budget every year and we'd expect that to continue. We expect to be able to capitalize on acquisition opportunities in the future just as we have in the past.

Greet, thanks very much.

David Leibowitz.

Good morning. I didn't quite understand an answer to an earlier question which had to do with the wide range in the fourth quarter. And the comment was, "we're also providing room on the downside." I'm not sure I understand that. Are you saying there's a possibility the fourth quarter would be down from a year ago?

There can be unknowns in the quarter, David. And the fourth quarter and the first quarter are subject to weather. So we like to have a wide range when it comes to those quarters.

At this point in time is there anything on the agenda that makes you believe that a down fourth quarter is a possibility?

No.

Thank you for the answer -- getting rid of that confusion. Also, on another question about '06's outlook, how much of the profit margin improvement can you carry forward into next year?

The profit margin improvements have been due to product mix and have been due to better operating efficiencies. We don't make those on a temporary basis. We try to make those on a more permanent basis. So, I think that those efficiencies will continue in the future.

Okay. And lastly, in your opening comments you referred to a sentence in your press release about under performing plants. At this moment in time how many under performing facilities do you have?

Two or three.

That's all? Now I believe the last time that was related there were four or five. Is that accurate?

There was probably five to seven I would say, yes, that's probably right.

And have you rebuilt the Canadian facility where you had the fire?

Yes, we have.

And is that now putting together the margins you had originally hoped?

Well, it's not doing what we -- well, that's a hard question to answer. When you're talking about a Canadian operation shipping into Canada and the United States you have these tax change issues. And right now they're working against us. So it's not doing everything we wanted it to do, but it's definitely moving forward.

And the last question. There was an item in one of the newspapers about a rush to try to salvage as much timber as possible from the flooded areas because of the hurricanes. Is that going to have an impact on pricing by putting out a glut of supply?

David, really -- that should work to our advantage because most of that fallen timber is going to end up being low-grade due to the checking from the wind and the splits in the product. So it will probably give us an opportunity to expand our industrial business because wood fiber is one of the main issues we have in continuing to grow that business.

Thank you very much.

Yes, sir.

(OPERATOR INSTRUCTIONS). Bob Veatch (ph).

In regards to as you look out -- without commenting on say next year's performance -- what sort of organic growth over a three or five year period based on the business you have in hand and customers you hope to expand with or new customers you'd like to attract and probably some bet on the health of the markets that you're served, do you feel the Company can perform at?

Historically we've been at about a 5% organic growth rate and that's about what we're tracking at so far this year. So that's a pretty good forward-looking target, too.

And based on the acquisitions that you've made in the last say nine or twelve months, on a beginning of year period at the start of '06 what will be your sales annualized run rate at that point versus where they were at the beginning of '05?

Acquisitions that we completed so far this year could add 10 to 15 million to sales for next year.

Okay. That's relatively small then compared to the base at the moment?

Right.

And on the new customer front, can you name anyone in particular who you've got a meaningful expanded relationship with?

Yes, KB Homes, Clayton Homes -- really our relationship is expanding with all of our major accounts. That's an honest answer.

Okay. And how about from a geography standpoint? Is there one or two that you can exploit in a more significant fashion than you've been able to do to date that you have on the radar screen?

Yes, Southern California looks very powerful especially with the added capacity we have out of our Tecate, Mexico plant. The Texas market looks very encouraging especially with the rebuild after the hurricanes. And then the mid-Atlantic division continues to be a very strong performer for us. The Northeast is very mature and we're just gaining market share and Florida is also a powerful market where you'll probably see us add some capacity.

So right now where are you serving the southeast from?

We have a plant in Ocala, we have a plant in Folkston which is right, just north of Jacksonville and we have a plant in Auburndale.

And they serve markets north of Florida as well?

These are Florida markets, yes.

Florida only?

We might hit Savannah a little bit out of Folkston, but primarily Jacksonville and South.

Okay. All right, thank you. Good luck.

Thank you.

Steve Chercover.

I might have missed this at the very beginning, but could you just elaborate a little bit on the relationship with Trus Joists? Will there be any write-offs with ceasing to produce your own floor joists and just what the overall benefit of that relationship?

No, the insignificant -- it just was a situation where we got a chance to be in a very high-level relationship with them. We already have a huge relationship with Warehouser (ph). The small I joist plant that we had was insignificant in the deal. So nothing to even talk about.

Okay, thanks.

David Leibowitz.

The venture you have with the framing company in Massachusetts where you now own 75% of the business, is there a possibility for you to accelerate and perhaps acquire the balance sometime in the next 12 months?

The deals already done. Not in the next 12 months -- it starts in 2006 and we buy it back at 5% a year on the same multiples that we acquired the rest of it. So there is a five-year plan to buy it back. But there's also a plan in place to really grow that business. That's why we extended the buyout a little longer.

Now if you get up to 80% next year by taking 5% more, that means you consolidate that on both your balance sheet and your income statement?

It's already consolidated in our sales figures and in the assets, the liabilities, etc. We just provide a minority interest line for his share of the equity of the Company and his share of the earnings as well. If we owned another 5%, 5% more of the earnings would flow to us next year.

Okay. And lastly, given the high note you're ending the year on, given the optimism for next year and beyond, I guess the concern given that the stock price has to be on the Street what could go wrong since obviously you're not getting the multiple you would otherwise be entitled to given your growth rate?

God only knows that, David. We don't know of any roadblocks. We're pretty optimistic about our future. We're pretty optimistic about our product mix. We're pretty optimistic about the relationships we've built with our customers and our vendors. We're pretty optimistic about the strength of our employee and management group. I don't know. I guess nobody forecasted Katrina, but we don't see a hell of a lot out there that could be a big problem for us.

Excellent and thank you very much. And keep up the good work.

Thank you, David.

Bob Veatch.

Can you comment on the decking market and how you're performing there and what developments you see unfolding?

Yes, we really can't comment on -- we're doing some things, we really can't comment on a lot of it, but our decking product, our Latitudes product that we make for the independents and our Veranda product that we make for The Home Depot, we're are sold out. So we're looking for ways to increase capacity for 2006.

And Home Depot, are you just serving them on a regional basis?

Yes, we serve -- I think we have about 50% of their composite decking, maybe a little less than that, but all we can handle.

Are they asking you to serve more?

We might go after another market, that's a question mark.

Can you comment on how stricter building codes may or may not be impacting the business?

For companies that do things the right way stricter building codes are better. We've got, especially in our modular business where there's new wind loads and new things that are out there trying to make the homes better. A lot of our products play right into that and that's been one of the reasons why we've been able to capture a large market share because of our unique products in that marketplace.

Would that pertain to the trusses that you're providing the homebuilders on site (multiple speakers) with SIMPSON connectors and so forth?

Yes, sir.

Actually I'm building out in South Carolina and the private builder says that's all he uses are your products and he can see how it's got to help to have those manufactured products and not have to build them on-site.

Yes, it saves a lot of money for the builders, it saves money in construction cost, it saves money in how fast they can build a home and it gives you a lot better quality in straight standard.

And will you typically use connectors as a standard product on those or is that only built to architects (indiscernible)?

No, we design everything in point loads from the foundation up to the roof and especially in any of your wind zones, every one of those components has a series of hangers or steel strapping that makes the whole house one unit.

And in the case of connectors, is SIMPSON a preferred supplier?

Yes, they are. They're a major supplier.

All right. Thank you very much.

(OPERATOR INSTRUCTIONS). Mr. Currie, I'm showing no further questions.

Okay. Then I want to thank everybody again for being part of the call and for being loyal to us and we'll continue to work hard to do a good job for you. Thanks a lot.

Ladies and gentlemen, thank you for your participation in today's call. This concludes the program. You may disconnect. Have a wonderful day. Thank you.