UFP Industries Inc (UFPI) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2005 Universal Forest Products, Incorporated earnings conference call. My name is Riaka and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference. If at any time during the call you require assistance, please key star followed by zero and a coordinator will be happy to assist you. I would now like to turn the call over to Ms. Lynn Afendoulis, Director of Corporate Communications. Please proceed, ma'am.

Good morning, and welcome to Universal Forest Products fourth quarter 2005 conference call. On the call today are William G. Currie, Vice Chairman and CEO, and Michael R. Cole, CFO, who will conduct the call and Michael B. Glenn, President and COO, who also is available for the question and answer period. Before we turn the call over to Bill Currie, please be aware 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 the express written consent of Universal is strictly prohibited.

Universal Forest Products is grateful you took the time to join us on this call and for your interest in the Company. If at the end of the call you have questions, we ask that you identify yourself by name and by the company you represent or if you're an individual investor to indicate that as well. At this time, I would like to turn the call over to Bill Currie.

Thank you, Lynn, and good morning, everyone and thank you for joining us on our call today. The only thing I can say about the fourth quarter of '05 and the entire year was holy [expletive] Batman! At Universal, we made it a practice to do what we say we're going to do and deliver faster than we promise. That's what 2005 was all about. We delivered on our goals and we met our five-year plan in three years. We were able to do that because we had a phenomenal year, a year when nearly everything seemed to go right and our focus on the basics paid off. We hit nearly $2.7 billion in sales. Our goal was to hit 2.65 by the year 2007. We increased our earnings by 39% for the year and our five-year goal was to increase by a third. We also, we saw an unusually strong fourth quarter with an 89% increase in earnings over the previous year. That was very powerful. It was even past our expectations. And we did this because we worked hard, and we did things right. Before I talk about our business segments and our outlook, I'll turn the call over to Mike Cole to discuss the financial results for the quarter. Mike?

Thanks, Bill, and good morning, everyone. I'll start by reviewing our income statement for the quarter. As you noticed in the press release, our total sales were 22% higher than last year, which was driven by organic sales growth, organic unit sales growth. By market, our sales to the DIY market increased 11% as a result of a 7% increase in selling prices due the selling yellow pine market and a 4% increase in unit sales. Our sales to the manufactured housing market increased 27% for the quarter, primarily due to FEMA orders associated with Hurricanes Rita and Katrina and continued strong sales to modular home producers. Our sales to the site-built construction market increased 32% for the quarter, primarily due to strong organic sales growth out of component plants in southern California, Texas, Colorado and the Atlantic region and our framing operations in the northeast.

Finally, our sales to the industrial market were up 21% for the quarter, due to very profitable organic growth spread over several regions as we continue to take market share. Due to the strong growth of our site-built manufactured housing and industrial markets, our sales to Home Depot comprised less than 22% of our total sales in 2005 compared with 25% last year.

Moving down the income statement. Our gross profit percentage increased to 14% this year from 11.8% last year due to a number of factors, including improved sales mix of higher margin value added products, improved results of underperforming operations, economies of sales associated with strong unit sales volumes, and cost reductions achieved through our corporate innovation initiative.

Selling General and Administrative expenses increased 33% for the quarter, exceeding our unit sales increase, primarily due to incentive compensation and certain employee benefits.

Our effective tax rate was 34.3% for the quarter compared to 40.5% last year, primarily due to to a change in Mexican tax law which reduced our deferred tax liability in Mexico.

Moving onto our cash flow statement. Our cash flow from operations increased by almost $24 million compared to last year in spite of strong fourth quarter sales growth and not having a sales receivables program in place at the end of 2005. This was primarily accomplished through better working capital management in the fourth quarter of '05 versus '04. Specifically, we reduced our average collection period with customers by almost four days and reduced our day supply of inventory by almost three days. Capital expenditures totaled almost $40 million for the year. This was 4 million below our previous estimate because some projects are still in progress and are expected to be completed in 2006.

A few points I would like to make about the balance sheet. First, our total debt at the end of December increased to $210 million versus $207 million last year, again primarily due to the fact that we didn't have a sales receivables program in place at end of '05. We're in the process of establishing a new program with a bank right now and currently believe it will be in place by the end of the first quarter. Included in debt was 53 million outstanding on our five-year revolving credit facility which has a total availability of 214 million after considering amounts reserved for letters of credit. And finally we're pleased to report that our leverage ratio decreased to 33% from 37% a year ago.

I'll conclude with a review of our 2006 targets. As you've seen in the press release, we're targeting unit sales increase of 10 to 15% and an increase in net earnings of 10 to 15%. This includes the impact of adopting FASB 123R which requires the expense recognition for stock options. Secondly, our capital expenditure target for 2006 is approximately 45 to $50 million, which includes 10 to $15 million for expansionary projects. We expect depreciation and amortization to total almost $30 million in 2006, or excuse me, $39 million in 2006. That concludes my comments on the financial statements. Bill?

Thanks, Mike. Now I'll try to provide you with a business update and then honestly and candidly try to answer any of your questions. Let's start with DIY market. Our performance, I told you at the third quarter conference call that we were really going to work to increase market share, that we were going to go back in and get very aggressive. As you saw, we did have the increased sales in the fourth quarter. Some of the new products that's we put on board, our main ornamental post caps, our decorators baluster systems, our new plastic lattice, and also our distribution agreement with Eon on their upscale plastic decking is really playing nicely into our product mix and to our sales gains. We saw DIY sales as a result of the hurricane, after any hurricane, there's always a strong demand for fencing and we had it on hand. We could produce a lot quickly and we sold a lot in the aftermath of the storms. In those storm-ridden areas, the fencing business is still very powerful.

We look forward to a strong 2006 in DIY as we evaluate expanded opportunities. We were awarded additional markets and additional products by our two very well-seated DIY customers, the Home Depot and the Lowe's Corporation, as well as new opportunities with independent dealers. Our new consumer products division is helping us focus on these new products and create outdoor environments that are second to none in the marketplace and bring us new products to market and help us develop new channels of distribution for current and new products.

Under the site-built arena, very strong performance, increased sales 32% for the quarter, 18% for the year. Many of our regions saw strong performance in site-built. Part of that was due to continued strong housing. Part of it was due to converting builders from stick building to our engineered wood components, especially in our southwest markets, and part of it was simply doing what we do better. Our emphasis on innovations, lean manufacturing and low cost producing are making us more and more competitive in the site-built arena.

As Mike said, we had strong organic growth in our plants in the Atlantic region, Southern California, Texas and Colorado and our framing operations in the northeast had a strong year.

We focused on our underperforming plants and that paid off. And we didn't face the same problems as we had in 2004 with a disappointing framing operation in the west. We also grew our national building programs with all of our national customers. While we expect the housing market will cool down a bit, we also expect it to remain very healthy.

Our site-built business isn't tied entirely to the housing market. As you might know, we supply builders with engineered components like wall panels and roof and floor trusses. Many builders still build their homes conventionally stick by stick but more and more they're growing to see the many benefits of the engineered wood component, including it helps them build their homes faster, it reduces error and improves quality, it reduces the need for skilled labor which is getting harder and harder to come by, and eliminates job site theft which is is a substantial percentage in every new home built. So much of our opportunity in site-built will be as a result of our success in converting builders to our products.

Industrial business, just another phenomenal year. Sales for the quarter up 21%, sales for the year up 13%. I sound like a broken record but the sky's the the limit. We added over 1,000 new customers in 2005 and and we probably have that many in line to add for 2006. We're growing with national existing customers that recognize all of the benefits of dealing with Universal. We bring a lot to the table. Teams of engineers, production professionals and salespeople to serve our accounts. No one else does that. That allows us to build better packaging and shipping products for our customers at lower cost. So demand for our services increase and we continually try to consolidate a highly fragmented market. I don't see any slowdown in this business.

Manufactured housing, 27% increase for the quarter, 13.6% increase for the year. This continues to represent a very steady, solid business for us. We have a commanding market share, thanks to a long and successful history in this market, and to some propriety products that help manufacturers build better and more customized homes. We've had strong FEMA-related orders in the fourth quarter associated with the hurricanes in the south but that gain's about over. And sales of our modular components continues to grow. Modular homes are becoming the home of choice on scattered lot construction in urban areas.

Summary, everything aligned this quarter. Our customers were busy and we grew with them. Our markets were strong, our focus on the basics paid off, our innovation program instituted last year by our President, Mike Glenn, has had significant impact on improving what we do and how much we put on the bottom line. Our underperforming plants are stronger, there are fewer of them and contributed to our profitability. And our people worked very, very hard and delivered. Because we hit our targets early, we're developing a new strategic growth plan which we will announce later this year and it will be aggressive. You can be sure our goals will be aggressive and we'll be confident that we can deliver. We look forward to the growth and development of our acquisitions which have already become a strong part of Universal and we intend to grow by adding more successful companies that we are now evaluating and putting through diligence. Our plans remain to grow 50% through organic growth and 50% through acquisitions. We are also grateful for strong partnerships with our customers and our vendors that make our success possible and make our work and life enjoyable. I thank you for the time today. And we'll now open it up for questions.

[OPERATOR INSTRUCTIONS] And your first question comes from the line of Cliff Walsh of Sidoti and Company.

Good morning, Cliff.

Good morning, everyone. Guys, basically if you look down at the four different businesses, you broke recent trends in terms of sales there in all of the businesses and I guess the weather and the hurricanes can explain everything but industrial. Can you talk a little bit about the strength there? I know you saw some market share gains but was there anything going on there other than that would have driven such a strong quarter?

Well, what's really helping us, Cliff, is we're getting some national accounts now that have manufacturing facilities around the United States and we'll get into one facility, go through our dog and pony show, develop and design the proper packaging for what they want and bring in a cost savings, and they're starting to move that around to other facilities and we're getting invitations to come in and put together programs for them. That's one of the main areas that is driving our industrial business is just our customers appreciating the service, the quality, and inviting us for additional opportunities.

Okay. And Mike, can you comment a little bit about some of the operational improvements that you made in the quarter? I know it's a little bit difficult to tell, given the volume was so strong. Is there a way you can break that out?

Yes. I can't break out the numbers for you but in terms of ranking them. Improvements in underperforming operations was very large. Also, the economies of scale we achieved for the quarter was also a big number and cost reductions to the innovation program was very favorable.

Okay. Maybe, Bill, you could comment on some of the operational improvements you have scheduled for '06 and what you think you can get from them?

Cliff, we have a constant plan done on a weekly basis with our President, Mike Glenn, on conference calls. He picks two or three plants each week and they go through all the disciplines of that plant and they figure out what is right and what is wrong and then they work to fix the problems and it's an ongoing process. It isn't once and it's over, and I can't quantify the dollars, but I can tell you millions of dollars were saved through these innovation programs in '05 and Mike continues to have those calls a weekly basis.

Gotcha, okay. Thanks so much, guys.

Your next question is from Steve Chercover of D.A. Davidson.

Good morning, Steve.

How are you?

Great, how are you?

Just fine. I knew you were great, already. First of all, can you maybe just differentiate between unit growth and top line growth, I mean should they both expand at a 10 to 15% clip in '06?

If the lumber market stays the same, our selling -- our sales numbers should increase with our unit numbers, okay? If we get a spike in the lumber market or drop in the lumber market, our unit sales won't necessarily correlate with our dollar sales but this year looks a little more stable than most and I don't think there'll be much of a difference between unit and sales growth.

Gotcha. So one is really volume, the other one's a function of price as well?

Yes.

In your commentary, you said you expect to complete some strategic business acquisitions. Can we infer that there are things in the pipeline that we're not aware of presently?

There are things in the pipeline. There are always things in the pipeline and we've been working on it for a while. We were able to put a couple together this year and we hope we can put a couple together next year.

Do you find that your ability to identify and consummate these acquisitions is getting tougher?

I don't know if I would say tougher. I would say the valuations are getting higher. People have had pretty good performance in a lot of the markets that we're in and so they're looking for their best year's multiple versus an average over a period of years. So, in that context it's getting tougher, but I think the excitement is there. I think to beat a lot of the companies, thinking being part of Universal and watching the balanced business model that we have and the continued strength regardless of the market, is adding some credibility to our -- to an acquisition.

One more and I'll hand it over. Do you think that your stock as a currency might prove beneficial to doing these acquisitions? It provides people with liquidity.

Well, the stock's really only traded about $60 and our management group owns a very large portion of it and we don't think that's a very high valuation for it. So we'll probably use cash, we have a lot of cash. We have a lot of available cash and we will probably hold that stock equity pretty close to home.

Understood, thank you.

Your next question comes from the line of Frank Dunau of Adage Capital.

Just have a few questions. You said that the guidance included stock option expense.

Yes. The estimate for next year does include the effect of that.

What is the expected expense in '06 versus '05?

For '05, it shows up on our footnotes only. It's not in the income statement for '06. It's $900,000, so it's very small.

Okay. And just on the site-built and maybe last year was kind of a strange year but if I adjust for lumber prices and stuff, you had a pretty good falloff from the third quarter to the fourth quarter in revenues, which looked to me to be a normal seasonal pattern, but this year you didn't have it and I'm just trying to figure out what is normal?

Well, you got two things. You got two things that work very heavily in our favor this year, which you know, they might be unique, they might be long-lasting. The first is the hurricane which we really don't hope happens again. That added some power to the manufactured housing industry. It added some power to the DIY business in terms of fencing and repair and remodel projects. It really halted any new housing in those markets. Usually our site-built business , it's a three to five year time before they clean up the sites. They get the insurance payments secured and then the rebuild starts. So it helped us in DIY, it helped us in manufacturing housing, probably hurt us a little bit in our site-built business.

The other is the weather. We had the mildest fourth quarter we've had in a long time. In Michigan and New York, Pennsylvania, very little snow, very little cold weather, and it was business as usual for almost the whole quarter. So those are the two things where the stars lined up right and helped our fourth quarter.

And in terms of just back to -- what was I going to ask. Now I'm confused again. Oh, just one more thing. I guess you guys, did you guys issue options to directors last week? Was that what I was trying to interpret out of those -- ? What was that all about?

No, no. We used to have broad based option programs where we issued them to managers, officers, starting in 1998, and we've continued that program for about five years and a couple of years ago we stopped doing it. But FASB 123R requires that you start expensing the effect of options and for us, although we're not granting anymore, we have a vesting schedule so when we grant them to somebody, there's usually a five year vest so we're now picking up the unvested portion that we'll have to recognize in expense. That's why it's a pretty small number.

So that's just a vesting thing? There's nothing to do with grants or anything?

Yes. Any grants we've done have been on an exception basis and have been very small the last couple of years.

I just couldn't figure out what that filing -- I was trying to interpret it. There are too many question marks on the page. And just one last question on FEMA, the FEMA stuff which you said helped in the fourth quarter but then you said the FEMA orders are about over. You --

Yes. The temporary housing is loaded in down there and any more production for manufactured housing on that is going to be relatively small. A lot of the HUD-type units that went down in there, we participated in some, but a lot of them came out of some Alabama and Mississippi operations where we really aren't that strong anyway. So, we look forward to a real good solid manufactured housing industry this year with returning back to normal production and normal shipments and we think it will be a little better. If we get some helping in financing from either Fannie Mae or Freddie Mack, and they start to accept that F paper again, we could see a pretty strong rebound.

You're not going quantify how much those FEMA orders were or anything?

No. I don't even know. I haven't the faintest idea.

Just one last question. You made a comment, I think in the press release, about one of the conditions on the outlook was manufactured housing shifting to modular housing. Is that more profitable for you to do that or is --?

Yes. Modular housing is built to a standard building codes, FBC, et cetera. It's more product, more complicated roof systems, more complicated truss systems, higher value products. Yes, it's much more profitable for us and we also have some patents that work very good into that business where we're the exclusive supplier.

Great, thanks a lot.

Yes, sir.

Your next question comes from the line of Jay McCain of Avondale Partners.

Hi, this is Jay, thanks for taking my call. Got a couple of questions on the modular that you all talked about at the end of your prepared remarks. What types of products or services besides the normal lumber, shingles, et cetera, do you all provide to the modular home builders?

We have a product could the Double Hinge which we have patented which allows a modular home to have a roof line like a conventional home. We can go to a 12-12 pitch with a 2-foot overhang. The last third of the roof cavity folds down into the roof section. And then when it get on site, it's erected up and you get a typical very high end home look, the same with the overhangs. Because of the restrictions on the road, you normally can have just a very, very small overhang which gives the home a factory type look. But when you can do two foot overhangs with soffits, et cetera, and then hinging down on the site, you can get a much higher quality, higher value home.

We also have the open joist floor system which is unique to Universal where we can build modular homes with an open floor system where all of the mechanicals, air conditioning, wiring, plumbing, et cetera, can be built through the floor cavity and then when it's set on the foundation, simply hooked up to the outside mechanicals. So unique advantages that make some of our products almost necessary if you're going to be in that business.

Okay. Great. And also, just going to see if you can give us some more color on why you believe that modular is becoming the home of choice for single lot construction?

Well, as these big production builders take over more and more market share, you're losing more and more of the small custom builders. So you start to get in a scattered lot situation in an urban area. There's no production builder that will touch that. He has to set up up on a large piece of property. He has to have a production schedule. Walls today, floors tomorrow, roofs the next day. So this modular home, where you can go in and design a completely customized home, it's built in the factory, then brought in in four or five sections and put on your foundation, gives people very high quality housing with a lot of alternatives for design and interior applications and immediately sets on the foundation in a very, very short time.

Okay, great. Thank you.

Yes, sir.

Once again, ladies and gentlemen, if you wish to ask a question, that is star followed by one on your telephone. Your next question comes from the line of David Leibowitz of Burnham.

Good morning. Briefly, the targets you gave us for '06 in the press release, a 10% on a unit basis and 15% on earnings, given the price increases that have already been instituted, what is that 10% translate to in dollars?

There hasn't been any big increases. David, as a matter of fact, the lumber market is flat today to where it was a year ago and it stayed pretty normal for the year. So I would say units and sales dollars, as we're looking at it today, are pretty much on track.

Okay. Second of all, is there anything brewing on the political front with Canada and the price of timber and imports, et cetera, and how would that impact you as the year proceeds?

It doesn't impact us. The duty's moving down from 29 to -- I don't know what the number is. I've heard anything from 10 to 15. That's just a pass through back and forth. That really doesn't affect us much. You know, whatever it is, it is. We're in the same game as everybody else.

Okay. And you mentioned your plastic product. As a percentage of total, what is the non-wood portion -- excuse me, let me rephrase that, I apologize. What is the growth rate of that product expected to be going forward over the next year or two or three?

It's still listed in most of the publications as double digit, 10 to 20% depending on whose you look at, and I think that's probably accurate. I don't know that that stays forever or that something newer and better isn't developed but the way we're looking at it right now, we're looking for a nice solid 10 to 20% increase in our composite businesses.

What percentage of your your sales in the year just ended would come from new products, meaning products introduced in the last 24 to 36 months?

I can tell you that our consumer products division, which we recently started, we hope by the year 2007 to be over $100 million.

Excellent. And lastly, right now how many underperforming units do you have?

We don't have too many that we would consider really underperforming but we still have -- we probably have a half a dozen, no more than that. But we still have additional opportunities in our good plants adding shifts, and adding a balance in their mix.

Very fine and again, keep up the great work.

Yes, thank you very much, David. We're hard at it and we think we've got a real good plan for next year and we're pretty excited about going to the hoop, so take care.

Thank you, again.

Your next questions comes from the line of Bob Fetch of Lord Abbett.

Good morning, gentlemen.

How are you?

Very good, thank you. Nice results. You earned 4%-ish pretax, I guess probably the first time this year.

Yes. Has a lot to do with mix but yes, that's about right.

From a utilization standpoint, you get the absorption and some of the units maturing in a "normal environment." Is there any reason why that shouldn't be somewhat more normal as opposed to say 3.5 or somewhat around that level?

As long as we can keep driving our higher margin, more complicated profit -- products, as long as we keep driving those and they become a larger percentage of our sales, I think you can look at that number as more normal.

That has the case, the more value added products for many of your customers. Is there any reason why that trend should reverse?

Sure hope not.

Okay. Got a house I'm building in South Carolina and it's clear when I look at some of those trusses and all of the connectors on them and so forth, makes a lot of sense for them not to be built on site anyhow. As far as geographies, where do you have low share or low market position that is meaningful in terms of potential growth?

We're still a little light in Salt Lake City, Phoenix, Tucson, Las Vegas markets that we are looking at. We're still a little light in the greater northwest. We could use some more Florida operations. We have a lot of business down there. We've got quite a few spots where we can still add some pretty substantial market share.

And as you penetrate or enter some of those markets, because of the fact that you're not there yet, have you found that there are entrenched players whereas a number of years back you might have been the new guy in town and the only guy doing it?

You wouldn't want to be an old entrenched manufacturer in an area that we decided to come into because we have a very aggressive approach. We are extremely competitive. We go direct to the builder. There's no middle man and competition we've never been afraid of it. As a matter of fact, we kind of like it because it makes us better. No, I don't see that as being an issue.

So are you only going into markets where you've got the customer in hand already?

We're going into markets where either customers ask us to go into or we see opportunity.

Okay. What are you actually experiencing and budgeting for labor cost increases? Wage cost increases?

We just finished that whole thing and we're in a 3 to 5% range throughout our whole Company including our executives.

And that doesn't vary much by geography?

No, sir.

Because it's clear parts of the south/southwest, just because of strength in the number of industries, are showing some at higher rates than that at this stage and supply seems to be getting a little tighter.

Most of our workers are on a bonus program, whether they're hourly workers or salaried workers, and we're able to mitigate any really high base salary increases just by pushing more productivity, making more profit and paying more bonus.

Okay. And then lastly. By virtue of the fact that you reached a five-year target in three years, does that mean you guys are going to rest for two years or have you guys created a new three or five-year plan?

Our president, Mike Glenn, is working with the operating officers now to come out with a new program this summer which will give us another five-year target or four-year target, whatever he decides to do, and then we'll go through that, we'll endorse it and we'll announce it like we always do, what our game plan will be over the next period of years. But we will be coming out with a new one this year, we're already working on it.

Okay, and if one were to look out over say the next five years, what sort of scenario would have to present itself not to generate double digit revenue growth over that period?

Oh, I don't know, World War III, a complete crash of the housing market, I don't know. We're pretty focused on growing our business and we think we can do it every year. That's just part of our culture, you know.

So you're essentially implying that you see some very strong organic opportunities yet to achieve?

Yes, and what really helps us is the business model is very balanced. Housing will go down a little bit. We'll put a little more pressure on the DIY side. Usually if housing drops a little, manufactured housing becomes more competitive because it's usually finance driven. Of the industrial business, can we bought a door. How quick we can integrate the needs of the customers and set up the proper manufacturing technique to give them what they want. We think our balance lets us grow no matter what happens.

Okay. Great, thank you very much.

Thank you.

Your next question is a follow-up from the line of Frank Dunau of Adage Capital.

Just got a couple of bookkeeping equations. Do you have an estimate for the tax rate for this year, 2006?

For 2006, our normal tax rate tends to bounce between 37 and 38%, depending on the mix of income by state to state.

All right, so basically the Mexican thing was a one off thing?

Yes. That was a one off thing.

Okay. And when you gave the guidance of 10 to 15%, I think, EPS growth, is that off --

Actually net earnings.

Net earnings. Okay.

We don't plan to issue shares right now.

Does that include the real estate gain that you had last year or not?

Yes. We included that in the 2005 number.

Okay. Thanks.

Yes, so the real operating would be higher than that, I guess.

Okay.

And at this time, you have no further questions. I would like to turn the call back to Bill Currie for closing remarks.

Okay. Well, thanks for listening to our quarterly and '05 conference call. We appreciate the support of our shareholders and the financial institutions that follow us. We understand your value and we'll work hard to continue to be a good investment for you. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.