UFP Industries Inc (UFPI) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Universal Forest Products' second-quarter 2006 earnings conference call. My name is Onika and I will be your operator 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. (OPERATOR INSTRUCTIONS)

As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes. At this time, I would now like to turn the call over to Ms. Lynn Afendoulis, Director of Corporate Communications. Please proceed, ma'am.

Thank you. Good morning and welcome to Universal Forest Products' second-quarter 2006 conference call. I'm Lynn Afendoulis, Director of Corporate Communications for Universal.

On the call today are William G. Curry, Executive Chairman; CEO Michael B. Glenn; and CFO Michael Cole. 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 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 express written consent of Universal is strictly prohibited.

Universal is grateful you took the time to join us on this call and for your interest in the Company. At the end of the call, Bill Currie will open it up for questions. If you have a question, we ask 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 would like to turn the call over to Bill Currie.

Thank you, Lynn, and thank all of you for joining us today, taking times out of your schedule to hear our good news.

I'm pleased to be on the call today for a number of reasons. First, it was another very powerful quarter; we were happy with the results. And then second, we are being joined by our new CEO, Mike Glenn, who will provide a review of our business for the quarter, as well as our outlook, after Mike Cole goes through the numbers.

To start off, I will simply say that it was a very good quarter. We're proud of it. We increased our earnings by 20% and our unit sales by 6%, even given a 14% decrease in the lumber market. So we had good market share growth. And we had a strong performance in our site-built and industrial markets, which continues to be double-digit growth for us.

We know we can't rely on having perfect conditions in all fronts all the time, but we stayed focused on a continued balance of our business and on driving out unnecessary costs, exceeding customer expectations and on being the best employer in our industry.

Before Mike Glenn talks about the results in our four markets and our outlook, I'll turn the call over to Mike Cole, who will go through the numbers with you. 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 for the second quarter increased 6%. This was comprised of an 8% increase in unit sales, offset by a 2% decline in overall selling prices due to the lumber market.

By market, our sales to the D-I-Y market increased 1% compared to the second quarter last year. Our consumer products division posted a strong sales increase as a result of our acquisitions of Maine Ornamental and DecKorators, and the distribution arrangement we entered into for the eon Decking products. Our western vision also posted strong unit sales growth as a result of picking up additional storage with the big boxes.

These increases were offset by a decline in unit sales out of our Eastern division, primarily due to a wet June in the Northeast, one of our largest markets, and a soft market in the Midwest.

Our sales to the manufactured housing market decreased by 7% for the quarter due to a decline in lumber prices for species used for this market. Our unit sales were flat for the quarter. Although we increased our sales and market share to producers of HUD code homes, this was offset by a decline in sales to modular producers, as that market softened this quarter.

Our sales to the site-built construction market increased 22% for the quarter, primarily due to 21% organic growth driven by our component plants in our Atlantic region and very strong market share gains out of our component and framing operations in the Northeast. Sales also increased as a result of our acquisition of Shepardville Construction last year.

Finally, our sales to the industrial market were up 6% for the quarter, comprised of an 11% increase in unit sales, offset by a 5% decline in overall selling prices due to the lumber market. Our unit sales increase was primarily driven by our plants in our Southeast region.

Moving down the income statement, our second-quarter gross profit percentage increased to 14.6% from last year's 13% due to a number of factors, including a higher ratio of value-added product sales resulting from our growth in our consumer products division, site-built and industrial markets; and sales of fencing, decking and other value-added product lines to the D-I-Y market; the economies of scale associated with strong unit sales volumes; and cost reductions achieved through our innovations initiative.

Selling, general and administrative expenses increased 19% for the quarter, exceeding our 8% unit sales increase, primarily due to compensation and benefits in accrued bonuses. SG&A has increased as a percent of sales primarily due to our increased sales of value-added products. Our effective tax rate was 38.6% for the quarter compared to 37.8% last year, primarily due to an estimated increase in certain permanent tax differences.

Moving on to our cash-flow statement, our cash flow from operations increased by $52 million compared to last year. This was accomplished through a combination of improved profitability, 2.5 days' reduction in our days' supply of inventory and starting a new sale of receivables program in March of 2006.

Our capital expenditures totaled over $16 million for the year to date, and we are still planning for a total spend of approximately 50 for the year.

Business acquisitions for the year include 2.1 million paid for the assets of Classic Truss; 8.4 million paid for the assets of DuraBilt, site-built truss manufacturer in Northern California; and 800,000 paid for an additional 5% ownership interest in Shawnlee Construction.

A few points I would like to make about the balance sheet. First, our total interest-bearing debt at the end of June decreased to 171 million versus 228 million last year, primarily due to strong earnings and the improvements in working capital I mentioned earlier. Included in debt was 14 million outstanding on our five-year revolving credit facility, which has a total remaining availability of 199 million after considering amounts reserved for letters of credit. And our leverage ratio decreased to 26% from 37% a year ago, which is below our target as we continue to a evaluate acquisition opportunities.

That completes my comments on the financial statements, Bill.

Thank you, Mike. Now I'm going to turn the call over to Mike Glenn. Mike, as of July 1st, became the fourth CEO in the Company's 51-year history. Him and I have worked shoulder to shoulder for all 32 years that he's been with the Company. He has one of the best business minds I know and has been a strong leader in our Company. Mike has held every job from salesmen all the way up to the region and divisional jobs until he became the President and Chief Operating Officer.

He has a vision and I have a vision and we share it about our Company. And we also share our philosophy about business. We are both committed to always doing the right thing, to being the best that we can be, and to maintaining a culture of innovation, entrepreneurialism, with a strong dose of respect.

After that, our styles differ quite a bit. You won't here Mike Glenn doing a lot of "Holy (expletive), Batman" comments or those kinds of things. But he will report on our earnings and our outlook with the same candidness and insight, and he will look to the future with enthusiasm. So I'm pleased to turn this call over to Mike Glenn for our business review. Mike?

Thanks, Bill. You know, I realize I'm following in some fairly entertaining footsteps, so I'm not even going to try to open up with any Currie-isms. I think I'm just going to get right into the business of our business, because we really had a very strong second quarter. And I'd like to begin with our performance in our site-built construction.

We had good organic growth, and it was partly because of the healthy construction markets where we have a strong presence. For example, we have a multiple number of plants in the Southeast where the housing demand remained very, very strong. And on the other side of it, we don't have a significant presence in a number of areas that are struggling, such as Phoenix, Tucson and Las Vegas. So we really haven't been impacted by the slowing residential markets in those areas.

Our framing operations in the Northeast had a very strong quarter and we have been able to pull sales of our lumber components with our framing services. In some areas like Houston and Dallas, we continue to convert builders from stick framing to our engineered wood components. This is really providing us with ongoing opportunities and helping us increase our market share.

But don't get me wrong -- we are reading the same reports that you are, and we are hearing the same things from builders about the slowdown in the residential construction business. We just haven't felt the impact at this time. We are getting more than our fair share of orders and we don't have any reason to believe that that will change. In fact, last week, I met with three of the major production builders in the country, and I can tell you that we are very, very confident that we are going to pick up some market share in three or four different markets in the country.

But that being said, we are still mindful of the reports and predictions, and we continue to focus on converting builders to our engineered components and really focusing on driving our cost out of our operations.

We are also focusing on our multifamily and commercial business, and where looking forward to naming a senior manager that is going to lead this charge in the very near future.

We continued our double-digit unit sales growth in the fragmented industrial market. This is really a huge opportunity for us, because really there is no one in this market that can bring the resources to the table like Universal can. This market is primarily dominated by ma-and-pa operations. And we are building specialty crating and packagings for thousands of different products. And we provide wood and wood alternative components for other products.

This market has allowed us to use our low-grade, which really fits in nice with our whole log strategy and allows us to use waste from other operations, which really helps us create an opportunity for higher-margin products.

We are continuing daily to add new customers and we are growing in additional locations where our national customers are. Quite honestly, the national customers we have are asking us to come into markets and open up operations to service them.

The industrial market has been a shining star for Universal, and we see opportunity at every turn. Most of you have probably read that we just announced the purchase of 50% of United Lumber & Reman. This is an industrial plant in Mussel Shoals, Alabama, and we have an option to purchase the remaining 50%. We are continuing to look for additional acquisitions and opportunities in the industrial market in various regions throughout the U.S.

As Mike Cole noted, we saw strong sales in D-I-Y through our new consumer products division. Products like our Maine Ornamental post caps, our DecKorators decorative balusters, our Latitudes composite decking and our Veranda composite products, which we make for Home Depot, had strong sales. Also, our plastic lattice had a great second quarter. These products enhance our product mix and really helped our performance in this area.

In addition, we picked up a number of big box stores in the Southwest. All that being said, we were a little disappointed in our sales in the D-I-Y in the second quarter. We think sales were down a little bit, largely in part to the weather in the Northeast, where it was rainy and it was soggy. And this happened in late May, early June, which is really the busiest time of the year in the Northeast for D-I-Y products.

And we still see that the Midwest, that area, the rustbelt, is very, very sluggish.

Finally, there is manufactured housing. As Mike said, the decrease in our top line for this market was primarily due to the lumber market. But we really appear to be picking up market share in the HUD code segment. This industry is about a quarter behind in reporting their numbers, but we do have the numbers from May, which indicate that the industry had an increase of less than 4% in year-to-date HUD code shipments, and Universal's sales to the HUD code manufacturers increased over 9% in the second quarter over last year.

Our modular sales appear to be approximately consistent with the national trends. In the first quarter, the industry reports that modular sales were off by about 7%, and our sales to that segment declined a little less than 6%.

In summary, the second quarter was very strong. We had strong increases in our earnings; we increased our market share of value-added sales, from 50% of total to 56% of sales. We improved our margins in a number of areas, and this was really primarily due to our focus on innovation and our continuing to drive out cost. We continue to have a strong performance in the site-built and industrial markets, and our people continue to work hard, they continue to innovate, they continue to deliver high-quality products for our customers.

Thank you, Mike. It is good to have you on the call and it's good to have you in the CEO's office.

I would now like to open up the conference call for questions. We'd appreciate it if you could please state the company you represent; or if you are an individual investor, if you would let us know that also. So let's open it up for questions, please.

(OPERATOR INSTRUCTIONS) [Steven Nissan], Excalibur Research.

Thank you very much. First of all, Michael, congratulations on a well-deserved promotion.

Thanks, Steven, I appreciate that.

And continued success in your COO position. A couple of questions -- also congratulations on the solid quarter.

How are you guys streamlining the buying process now to help reduce order inaccuracies and allowing now a lot of your new customers to overall configure and price your products more efficiently in the market, to make it easier for your customers?

Let me try to get that question again. Steve, did you say how are we streamlining our purchasing?

No. How are you streamlining the buying process to your customers? How are you allowing your customers to make a much more -- how are you making it much easier for your customers to reduce order inaccuracies --?

Okay, I got you. This will give you a pretty good insight to it. We are doing about 3000 tractor-trailer loads a week with the Home Depot. And there is no paperwork. From the time the order goes into the computer until the time we receive the check, the entire thing is paperless. And we are doing that through our whole supply chain system, up through our mills, all the way through vendor-managed programs at our plants, to completely electronic sales invoicing and getting our check. So we are pretty far ahead of the industry in our ability to implement technology to streamline that process.

What would you say some of the areas of concern still are that you are trying to address, to make sure these are guys are ahead of the curve in this --?

Well, we are pretty sure -- we know we are ahead of the curve. The problem is getting some of our vendors and some of our customers up to speed. We are actually having our technology people work with them so that our systems can talk to one another, and that we can do as much as possible -- the more we do electronically, the more accurate.

Okay. So right now, some of your vendors are not really up to speed. So are you putting in programs to better communicate with the dealer channels?

Yes, we are actually visiting them, we are putting teams together. We are visiting them and we are working through our technology programs to try to get everybody up to speed.

Are they open to these programs or they've kind of been pushing back? Because obviously a lot of --

The larger ones, like Weyerhaeuser, are open to it, and we are getting very close. Some of the smaller ones, it will be a real challenge.

And final question, Mike, of course congratulations in your position. For the next year, what would you say your number one thing you would like to accomplish is, and (technical difficulty), how do you plan to go on about that?

Steven, probably the biggest challenge that we have is to continue to hire and train people to fit into the Universal culture, to continue to take the people that we have that have been with us for a long time and put them into positions that will continue to grow the Company.

Great. Thank you very much. Congratulations on a solid quarter and good luck down the road.

Thank you.

[Andy Keller] with Merrill Lynch.

Good morning, Andy.

Frank Dunau with Adage Capital.

Yes, I had a few questions. You guys were giving so much good information on the four segments. Could you just go through one more time just the unit sales increase or decrease for each of those four segments you break out?

Sure. Our unit sales for the D-I-Y market were up a percent. Our manufactured housing market is flat. Our unit sales for site-built were up 24%. And our industrial segment was up 11%.

Okay.

That is units for the quarter.

Okay. I guess what I am trying to do is -- how much -- I'm just trying to get like, for example, on site-built, where you are up 24% unit, 22% is just revenues and lumber is down 14%. I was just trying to figure out how the lumber pass-through works. Because clearly something didn't fit.

Only a certain portion of the selling price is lumber-related per segment. There is a different margin structure to our site-built trusses, for example, and a lot more labor and overhead. So it has much less of an impact than it would, say, for treated lumber.

Okay. And just along those lines -- because I can't make the assumptions that are correct. If I were to assume there were no pass-through in your sales, what would the margins have been? Because I mean to the extent there is some pass-through and lumber prices go down, that mathematically just improved the margins --

If you just want to look, one way to do it if you just want to look at it in total, would be the overall selling prices were down 2%. So what you could do is take the sales levels for the quarter, knock off 2%, and then rerun -- take the gross profit dollars by the adjusted sales.

Okay, great. Thanks.

Greg Halter with Great Lakes Review.

Good morning. Congratulations on the good quarter. You talked to, Mike, early on -- I guess Mike Cole -- I should be specific here -- regarding the balance sheet and the strength you have at 26% debt-to-cap and I think it is 21% if you net out the cash that you have.

I wonder if you could comment a little bit more on the prospect for acquisitions, as well as the parameters that you look at maybe in pricing or whatever else -- accretion or dilution or so forth?

Greg, this is Mike Glenn. We continue to look at acquisitions in all four of the segments that we are in. We've got three of them that we're looking at right now that are pretty hard. Our acquisitions are all done on a multiple of EBIT. And for the most part, most of the acquisitions that we make are accretive.

Yes, our multiple range, Greg, is in the 4 to 5 times EBIT range. And that allows us, we feel like, to earn a good return on our capital.

Okay, great, that is helpful.

Greg, I think it is also important -- this is Bill -- I think it is also important to know that in these kind of times when we start to see some struggles and people start to get a little more worried about what is happening, we find it's a really good time for us. Because with the strength of our balance sheet and the management team that we have, we can move in very quickly to gobble up some share if we see the right deals.

Okay, that is helpful. And then also, given the fact that the stock price is down about 30% or so from its all-time high, I just wondered what the share repurchase prospects would be? Do you have a plan in place? How many shares are available? I know you bought back in '02 -- I think it was maybe $40 million worth. I'm just wondering if you could comment on the prospects for that.

We have about 1.5 million shares that we have been authorized by the Board to buy back. On the little preconference call before everybody actually got on, we were discussing at what level we were going to start to buy shares back. Because we are not very happy with the stock performance right now, we don't think it's -- we think we are just kind of thrown in with what has happened in the market. And we will be looking aggressively at some share repurchases.

Okay. And Mike Cole, wondered if you have the Accounts Payable figure for the quarter, the dollar figure? Just as a housekeeping item.

You bet. It is 146.4 million.

Okay, great. And you commented about new customers, and I know in the industrial segment, it's one area you have been adding quite a few. Any recent examples that you can give us, as well as any additional cost saving items that you put in place in the last quarter?

We will have the new customer count; we are going through that count right now. We will have that in our 10-Q when it is filed in a week.

Okay, okay. Specific on the tax rate, Mike, you had mentioned it has gone up due to certain permanent differences. Is that 38.6% level for the second quarter what you would expect for the rest of the year and go-forward basis?

Yes, you know, it should be around that level, Greg, but your mix of income that you earn from state to state and from country to country can have some impact on that. So we are accruing at about the same rates, but mix could make it go up or down a little bit through the balance of the year.

Okay.

(multiple speakers) -- just a little.

Okay, thank you. For 2007 -- and for '06, I know you mentioned about 50 million in CapEx. Do you have an early estimate there? And what percentage of your CapEx is for maintenance versus new plants and so forth?

50 is what we plan to spend right now for the balance of the year -- or for the total year, excuse me. And our maintenance CapEx runs at about depreciation; it runs about the same rate as depreciation.

And any early figures for '07 at this point?

That's something that we'll work on later in the fourth quarter as we develop our budgets. But just general ranges, again, you're going to want to use maintenance CapEx, again, about equal to depreciation. With respect to expansionary CapEx, we tend to do from 10 to 15 million a year.

Okay. And one last one for you. On your organic sales growth in the second quarter, is that 8% figure an organic number or it would be something off of that somewhat?

No, that is a good question. The 8% figure includes acquisitions and new plants, so the organic figure was 6%.

Okay.

Kind of a modest impact from acquisitions this quarter.

Okay, great. Thank you. And congratulations on the good results.

Thanks, Gregg.

Steve Chercover with D.A. Davidson.

How are you all doing? First question, I guess I was hoping for some sort of vision for project 2010 or whatever you are going to call your next three- to five-year strategy. Do you have any comments on that?

Yes -- good question, because we are meeting a week from Monday to finalize that, and we should on the next call be able to announce the 2010 plan.

Okay, great. Assuming it is still going to be aggressive. You didn't change your outlook for the full year, but would you characterize the first half as ahead of schedule?

Yes, I would. Yes, the first quarter was really strong, and I would say it is fairly -- we're pleased with the second quarter.

Yes, I think it is tremendous to eke out the earnings growth without really the top-line benefits. So you are doing something right.

What makes you think -- because I guess I've been wrong as well with what is going on in housing -- that you will still be able to grow the site-built? Is it simply -- are you sold out on that business right now? And you said you have three kind of production builders that seem to want to give you more business. Is there good visibility there?

Yes, we are not sold out. Like we mentioned earlier, we continue to take some of the builders in Texas and convert them, which is a stick frame guy -- we've converted the components, which helps us with our market share. And then we are making some strategic moves with a couple of our production builders which are going to give us some market share in a couple of areas of the country where there is some strong sales growth yet.

And I suppose once you convert them to your components, it's much easier to retain the business.

Correct.

Okay, and then just one other question, and then I will turn it over. And it is with respect to, I guess, the opportunities to repurchase shares versus accretive acquisition. Can you do both? And would you consider perhaps making the dividend more substantial as a way to make it an ongoing return of capital to shareholders?

You know, our first priority is going to be for acquisitions. But we will have to look at dividends and share repurchases too.

Okay, thanks so much --

And we'll just keep in mind our capital structure when determining how much we're going to commit to each one of those three.

But apparently doing an aggressive share repurchase would not preclude or stop you from doing some pretty substantial deals as well?

We are committed to growth and acquisitions are a key part of that.

We have a lot of capacity.

Yes, I recognize that. Okay, thank you.

Cliff Walsh with Sidoti & Co.

Good morning, everyone. Building on the acquisition questions, can you guys talk about whether or not you've seen asking prices come down, become a little bit more reasonable, with housing kind of showing signs of slowing down?

Well, I don't know if we can say that the prices have come down yet, but we can see that there has been a whole lot more activity and a whole lot more people have been calling us, looking to make some deals.

There is a lot of activity. I guess it is fair to say we would expect them to continue to come down; we haven't quite seen it yet.

Okay. So maybe so these order rates kind of materialize into actual construction activity, maybe we'll see prices come down a little bit more. Is that fair to say?

I think so.

Okay. And you had mentioned that the D-I-Y business was a little bit slow in June, given the weather. Any comments on how activity has been so far in July?

We are kind of like into the second week, so it is really too early to tell. We had the week of Fourth of July, so that kind of skews your numbers a little bit. But I can tell you this -- it hasn't fallen off the map.

Okay. And just in general terms, how would you characterize the decking season so far this year?

Our composite plant is having a phenomenal year. Our increase is very -- double-digit. We are seeing a little bit of a slowdown in some of the standard decking. But the composite has been a beautiful thing to watch.

Okay. Great. Thanks very much, guys.

Frank (indiscernible) with Pilot.

Good morning, guys. On the composite side, how big is that business now in terms of revenues?

How big is our plant?

No, in terms of this quarter. Or, you know, you are saying it is really growing. What did it used to be, what is it today, or what do you expect it to be for the year, I guess, in terms of revenues or any way you could break that out?

It will approach $50 million.

Right.

This year?

Yes.

And what did it you last year about?

Not quite 30.

Okay. And then on the site-built side, are you seeing any pricing pressure, whether it is from competitors that do what you do, or just kind of the big homebuilders? Things are possibly slowing with them and they are trying to get more aggressive with you -- are you seeing any of that yet?

We are seeing some of it, but try to keep that in the context that we've really invested in our plants, our plants are very low-cost producers. High technology, a lot of innovations, and we will toe-to-toe with anybody if it gets down to a pricing war.

Okay, all right. Very good, thank you.

David Liebowitz with Burnham.

Good morning. Briefly, a bit confused on the year-end outlook section of the release, where you said net income growth of 15 to 20% and a 10% to 15% growth in sales. And my question is even with the reduction in lumber prices, if you were to come in at the low end of that range, wouldn't you be pretty much flat to down in the fourth quarter?

Yes. David, one thing to keep in mind is with the hurricane activity last year and the impact that that had on our manufactured housing business.

How much incrementally can we attribute to that?

You know, David, it's hard to come up with an exact number there. But it could be as much as $0.10 a share.

Oh my. That having been said, did we have any pull-through numbers in the first quarter on that as well in this year?

There may have been some early on in the quarter, but not nearly the type of number that we saw in the fourth quarter.

Second of all, what is the normal slowdown that you've experienced over the years when the housing cycle does go into dramatic decline?

Normally, if you watch the cycles over the time that it happens, when the site-built housing goes into a decline, you are usually going to see your HUD type manufactured homes start to increase production. And you'll also see your D-I-Y business strengthen, because if they're not buying new homes, they are fixing up the ones that they have. So we see the manufactured housing and the D-I-Y as a little countercyclical to the housing market.

And having said that, the D-I-Y segment was only up 1.4% versus the prior-year quarter. Why was that not a little more robust? Or was that simply pricing?

Where we really got hurt was in the Northeast, David. And you lived up there, so you know May and June was just solid rain. And so that whole buildout you usually get up there -- it's one of the biggest decking markets in the U.S. -- and it was very sluggish. And then with the problems with the auto workers in the Midwest cities, all of them -- Detroit, Chicago -- go up and down the list -- Cincinnati -- we are seeing very, very modest numbers coming out of our D-I-Y operation.

And is that carrying through in the third quarter as well?

It is too early to tell yet. I think we look for the second half of the year to be quite good. Again, we think it will get -- if the housing really does take the kind of -- it does take the kind of drop that a lot of people are forecasting, even though we haven't seen it, we think that the D-I-Y business will be more robust.

And lastly, with the various acquisitions that you have made so far this year and are hopeful of making as we go forward, how many more regions of the country do you hope to be able to be in to pick up more D-I-Y business from your key national accounts?

That is a pretty (indiscernible). We're looking at some very large markets.

And then the very final question -- I apologize for staying on so long. Do you have any deals you would be hopeful of consummating in the third quarter?

Yes.

Excellent. Thank you so much.

Mark Weintraub with Buckingham Research.

Thank you. I wanted just to follow up -- you had talked about growth coming about 6% organic, 2% from acquisitions. Can you give me a sense on the organic side, how much of that is share gain versus whether there was any just overall uplift in the market?

It is all share gain.

All share gain.

That is exactly right.

Okay. And so in a weak type of housing market, obviously the site-built would be down and maybe industrial may or may not. But basically your point is that the D-I-Y would probably still be up, and I guess manufacturing normally would be up, but maybe this cycle is a little bit different. Does that all make sense with what you were saying?

That makes sense. And just remember that we are constantly working on that balance. Okay? And we have pretty good ideas where we can grow, regardless of what happens to the rest of the world. And that is kind of the strategy we always take.

And then historically, what has been your experience of taking or getting additional share gain in something like D-I-Y if the overall housing market is weak? Does it become tougher because some folks on the margin start moving -- somehow product though the chain moves a little bit more into that area? Does that change at all in a weak housing market?

That doesn't change.

Okay, thank you.

Bob Fetch with Lord Abbett.

Good morning. In regards to D-I-Y, what has been your pricing in traditional treated lumber?

It is a fixed dollar amount that we get on the value that we add. You know, there is an index that comes out every week called Random Lengths Publication, and it says what the average sale of lumber is in a particular species. And our numbers to our big customers is an add-on to that. Okay?

Um hmm.

So if the lumber market moves up or moves down, the only thing it does is it changes our margin percentage; but our fixed dollars are the same.

The cost of the material, though, for treated lumber is up significantly -- is probably up a bit because it is copper based, correct?

No, our pricing is --

Year-to-year.

But your suppliers are affected by copper prices, are they not?

Correct. Our pricing is fixed for the year.

Yes, our pricing is fixed for a year.

You mean your costs are fixed as well as your pricing?

Correct. Both are fixed.

Both -- both are fixed at both ends. So you should be able to maintain a margin at a level once they are both fixed.

Yes.

From a chemical standpoint, correct.

And to your customers. So you fix them about the same time?

Yes.

All right. On the composite, you talked about the sales run rate for the year. What is the capacity of the facility?

We are approaching it.

Okay. And intentions from here?

The intentions is we will probably take out some of the older machines that we put in when we first built the plant and put the newer machines in, which will give us a much higher throughput, and there is probably about eight of those machines that we can replace next year.

Eight out of how many?

Eight out of 20.

And that might increase capacity by how much?

That is a good question. We will probably pick up an additional --

10 to 15%, isn't it Mike? Isn't that what we looked at?

Yes, I was going in dollars, but that is correct.

And you have the eight machines now or they are on order?

Neither. We don't have them and we don't have them on order yet.

Oh, okay. So how long might that take to replace then, I guess?

It is not a problem getting the machines. I think really, Bob, what we are looking at is there are a couple other opportunities that we are looking at in that plant on some new technology. And we are trying to decide which way we are going to go right now.

Okay. On the site-built, I would just like you to speculate a little bit on the issue of to the degree that the last few years, labor might have been on the tighter side, obviously with the market as strong as it was. As that eases for your site-built customers, are they more likely to move faster in your direction or less so?

Once people -- once the builders start to use the engineered manufactured components and we go through the value engineering process and we show them the difference in quality, build time, [sets] on the job site, accuracy of the homes that are being produced, they never go back to stick-built. I've never seen one go back to use -- throwing out of roof trusses and wall panels and engineered floor systems to go back to pounding nails.

I guess the question is on those that haven't moved at it, were they likely to drag their feet longer then?

That could be. In some of your real loose labor markets -- that is why Houston has always been a stick-built market, because there was lots of labor readily available. But again, we've converted so many builders in Houston that the one plant that we put in is already at capacity and we're looking for a second plant.

Bob, it's not only the labor part of it; it is the theft that is on the job site, it's the fact that you are building these in a controlled environment, so when you deliver a product to the job site it goes up right away and you don't have a mold issue with your lumber. It is a quality -- and those job sites, you are seeing probably anywhere from 10 to 15% of that walk off the site.

Okay, great. On the industrial business, what sort of leading indicators should one watch in terms of having some sense of the direction of your business there?

I think picking up market share is what is really driving our business, more than any end market indicators. The gains that we getting -- the unit sales gains we are getting each year are more as a result of competitive advantages we have instead of market share.

Okay. And there is somewhat easy pickings only because the shares and penetration is so low at this stage?

Yes.

There is probably 1000 customers we have backlogged that we haven't been able to get in and get our work done and get the designs done and get the testing done. We should be able to continue that market, growing in that market, just by continuous market share pickup.

Again speculating, with your site-built customers, if their business softens, are you likely to have to give up anything in pricing for them to maybe protect their own margins?

We may have to give something up in pricing, but we really believe that going back to our whole log theory, that that gives us a huge advantage over other competitors who are simply going out to the mills now and trying to buy just a specific length or just a specific grade. Where we can go in and buy the whole log and it really gives us a very strong competitive advantage.

And our plants, as Bill alluded to earlier, while we didn't make as many acquisitions as we wanted to, we took a lot of our money and reinvested it in our plants. And we have state-of-the-art plants; they are very, very efficient. And even if we have to come down a little bit, we are still going to maintain strong margins.

Okay. And where is your share quite small geographically at this point? And where would you like it to be larger than it is today?

Well, we are not in Phoenix, thank God. And we are not in Las Vegas. And if you'd asked me a year ago where we want to go, I probably would have told you there. But we would like to grow our presence in Florida. And in long-term, Phoenix is still going to be a good market. It is just going to probably take anywhere from six to 12 months for that to flush out.

And what level of business do you have in Florida today?

Just a very small percentage. We have a plant up north and we just acquired one, I think it was last quarter we announced it, down south. But it is a very small percentage of the market. We are actively pursuing other opportunities there.

All right. So you are actually in a pretty advantageous position right now, to the extent that your business hasn't really been helped by those areas that were the strongest that are probably likely to have the largest decline from at least pre-existing levels?

I couldn't have said it better.

That's accurate.

And lastly, you talked about your number one share -- or objective in the next year was attracting and retaining and training people. Are there some meaningful senior management retirements scheduled in the next few periods or do have some current open requisitions on positions at senior level that need to be filled?

Probably shouldn't comment on that.

But we do have a very, very strong succession plan in place, all the way down through the ranks. And we have very, very capable people that really are -- we are late in promoting them. We don't have the issue there.

I think what Mike is talking about is getting the entry-level sales production people in that have the Universal culture that buy into the work hard, play hard, do what you say you are going to do, love your customer kind of a thought process that we try to train. And that is where we continually are searching for talented people.

Well, it just seems some uplifting a discussion once again today in the context of previous ones, that you've got an operation where, first of all, management is very focused. They've got a history of winning, becoming more important to their customers, with strong balance sheet and cash flow to pretty much deliver on whatever strategic objectives that you guys are putting in place.

And to the degree that just need to hold on a little tighter, because some of their end market volatility might be a little higher in the period ahead of us, that you've really got the hatches battened down where you are going to only come out stronger on the other side.

That is the way we are playing it.

All right, great. Good luck.

Greg Halter with Great Lakes Review.

Hi, guys. Two quick ones for you. Can you comment on how much Home Depot was of the business in the quarter?

Depot was about 22% of our total sales for the quarter.

Okay. And that is up from I think 17 in the first quarter?

Yes. D-I-Y is a bigger quarter in the second quarter than the first.

Right. And then lastly, Mike Glenn, you had made the comment about you met with three of the major production builders last week. If you were to get one or two or all of those, is that for their building operations throughout the country or does it go market by market? Can you explain how that would work?

It is market specific, Greg. There is a couple areas that we wanted to bolster our sales, and we had met with these three different companies and feel fairly confident we will be picking up some market share in different geographical areas. But it is not a national contract.

Okay. Is that something you would strive for, is a national contract with these types of guys?

They aren't set up to handle it. You know, most of them are still very powerful from a region or a location. Even though they all have national purchasing people, a lot of the kinds of things that we sell are done more by region.

Okay, great. Thank you.

Frank Dunau with Adage Capital.

Just back to your treatment chemicals in the wood treatment business. Were you price protected for one or two years? I guess there is rumor in the industry the chemical guys actually protected you back -- not the beginning of this year, but two years ago.

Yes, we had no price increases for two years.

Okay. And so does that run out at the end of the year? And if copper prices were to stay where they are now, is somebody going to try to hit you with a big bill next year?

We had a lot of leverage in that business; we buy a lot of chemical and we also had a very good supplier, and we will work through the numbers. But whatever it increases, though, understand that that would just go into the add-on that goes on when we sell the product.

I mean, is that contractually [allowed]? I mean, is that like lumber or is that something -- or do you actually have to go and negotiate that one?

We negotiate that.

Okay, thanks.

At this time, there are no questions in the queue.

All right. Then I would like to thank everybody for participating in the call and all the good questions. And hope we gave you honest, candid answers. We've got to get back to work and make sure that we are getting our share of the market. Thank you very much and have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Thank you and have a good day.