UFP Industries Inc (UFPI) 2006 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q4 2006 Universal Forest Products Incorporated Earnings Conference Call. My name is Francis 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 toward the end of this conference. [OPERATOR INSTRUCTIONS].

As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to Miss Lynn Afendoulis. Please proceed.

Thank you. Good morning and welcome to Universal Forest Products Fourth Quarter 2006 Earnings Conference Call. I'm Lynn Afendoulis, Director of Corporate Communications for Universal.

On the call today are Executive Chairman, William G. Currie; CEO and President, 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 uncertainties. These risk factors and additional information included in the Company's reports on Form 10K and 10-Q and filed 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.

We thank you all for joining us on the call today. At the end of the call Bill Currie with 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. Good morning and thank you for joining us for our fourth quarter and 2006 year-end conference call. You know I feel a little like Tony Dungy in the first few minutes of the Super Bowl. It's pouring rain, we had to punt on our first possession and we are down 7-0. But I know we have the right game plan, I know we have the best quarterback. I know we are tough in our skill positions, I know we are good at blocking and tackling. I know our loyal fan base. Our customers, vendors, employees and shareholders will be there at the end of the game when we hoist the trophy.

Sure the fourth quarter was tough, tougher even than we anticipated. Because it is the first time we saw three of our four markets choke at the same time. Housing starts down 41%, manufactured housing production down 50%, negative comps at our big DIY customers, but we still had a record year. Because these kinds of economic climates create opportunity for Universal. They let us show our stuff. We were able to acquire Banks Lumber Company our only national formidable competitor in manufactured housing because there wasn't enough business for both of us and we got what we paid for, good people, good plans and good ideas.

On February 12 we expect to close on Aljoma Lumber, one of the largest treating plants in the world and the only one in South Florida with port access to the Bahamas and the balance of the Caribbean. Look at the opportunities. Those areas have not yet been introduced to Latitudes Decking, DecKorators powder -- powder-coated aluminum and glass railing system, [Menor] metal accessories, TechTrim Polystyrene Trim Products or our new Copper Solar Deck Post Caps and nearly all construction in that area is either concrete or pressure treated lumber and plywood.

Since the start of the down turn in housing, more than 150 component manufacturers have gone out of business and many more are teetering. We see more opportunities to acquire component operations in geographic locations where we aren't located, at much more reasonable multiples. So you'll see us grow our site-built business.

We are opening new industrial plants from Tecate, Mexico to White Bear Lake, Minnesota to Auburndale, Florida as this is still a strong and growing market for us. We will focus on three areas. One, our customers. We want to be every customer's best supplier. 100% customer satisfaction is our goal we will continue to say 'yes' instead of 'no.' Our suppliers, more innovative programs that are we win, win for both companies. And our employees, professional, high-end training at all levels of our Company and continuous improvement, eliminating waste and innovating.

Remember, there are four quarters to every year. The first quarter will be tough, coupled with frigid wet weather all over the country with the existing economic conditions and you have a tough playing field. But the second quarter will be better and we think the third and fourth quarters will get good profitable growth to UFPI. We are optimistic about our chances in 2007.

Before we turn the call over to our CEO, Mike Glenn, Mike Cole will review the financials with you. Mike.

Thanks, Bill and good morning everyone. I will start by reviewing our income statement for the quarter. As you noticed in the press releases our total sales for the quarter declined by 24%. This was comprised to a 15% decline in unit sales and a 9% decline in overall selling prices due to the lumber market.

By market, our sales for the DIY market decreased 24% compared to the fourth quarter last year resulting from a 7% decline in prices combined with a 17% decrease in unit sales. Our sales were primarily impacted by lower lumber prices a decline in fencing sales due to hurricanes in 2005.

The soft market conditions resulting from decreases in consumer spending in housing. Earlier in the year you might recall that we picked up many new stores and skews with our big [box] customers which helped offset the effect of difficult market conditions this quarter.

Our sales in manufactured housing market decreased by 37% for the quarter due to a decline in lumber prices combined with a 26% decrease in unit sales. This market continues to be soft as the industry reported a 26% decrease in head coat production of approximately 50% due primarily to FEMA orders last year while modular production is estimated to be off 7%.

Our sales in the site-built construction market decreased 22% this quarter as a result of the difficult housing market which starts off over 40%. Finally, our sales to the industrial market decreased 13% for the quarter primarily due to the lumber market as our unit sales increased about 5%.

Moving down the income statement, our fourth-quarter gross margin decreased to 13.7% from 14% last year and our gross profit balance decreased almost 26%. These declines were primarily due to our decline in unit sales and fixed manufacturing costs and greater pricing pressure in the site-built market.

Selling, general and administrative expenses decreased by $5.1 million for the quarter. Our decrease in SG&A was driven by a $7.6 million decrease in the SG&A of existing operations and operations we closed this year, while newly acquired operations had a 3.3 million in SG&A.

Our income taxes were impacted by a Federal Research and Development tax credit estimated at $4.5 million for years 2001 through 2006 and an expense totaling $1.1 million for valuation allowance against the deferred tax asset. New regulations were issued in recent years that permit many of the activities we perform in our business like product and process design and improvement to eligible for the credit.

Congress recently extended the credit retroactively for 2006 and it is currently scheduled to expire at the end of '07. The credit we estimated for '06 was approximately $1.3 million and we currently estimate a similar benefit for 2007.

Also the valuation allowance totaling 1.1 million was to write off a portion of the net operating loss carry forward we recorded as a deferred tax asset for our Canadian subsidiary. The loss carried forward was built as a result of the fire we had at our Windham, Ontario plant in 2004 and a difficult housing market in Detroit. Without these adjustments our quarterly rate was 36% and our quarterly net earnings were approximately $5.8 million or $0.30 a diluted share.

You can take a step back from the details and look at the decline in our net earnings for the quarter without the tax adjustments. The largest contributing factors for the decline were our site-built component operations and the positive result of hurricane related demand in 2005.

Turning now to our cash flow statement, our cash flow from operations increased by $78 million compared to last year. Primarily as a result of utilization of our parts program in 2006 and a reduction in working capital due to a decline in business and a lower lumber market.

Our capital expenditures totaled over $43.5 million, which was close to our revised estimate for the year. Business acquisitions for the year most recently include $44.7 million paid for Banks Lumber.

A few points I would like to make about the balance sheet -- first, our total interest bearing debt at the end of December decreased to $170 million versus $209 million last year as a result of strong operating cash flow used to pay down our revolver. Included in debt was $15.9 million outstanding on our five year revolving credit facility, which has a total remaining availability of $198 million after considering amounts reserved for letters of credit. And our leverage ratio decreased to 24.8% from 32.7% a year ago.

I will conclude with a review of our 2007 targets. We are currently targeting a 10% to 15% increase in unit sales, which includes the impact of acquisitions we completed in 2006 and the Aljoma acquisition we anticipate completing in February.

We are also targeting net earnings growth of 5% to 10% over 2006 net earnings excluding the tax adjustments I mentioned earlier. We are estimating depreciation of $36 million in 2007 and amortization of intangible assets of about $10 million, which again includes acquisitions from '06 and the Aljoma acquisition in '07.

And finally we are targeting capital expenditures for the year of approximately $40 million. That completes my comments on the financial statements, Mike?

Thank you Mike, now we'll turn it over to our CEO, Mike Glenn.

Thanks, Bill. You know, for me this is a great opportunity to show what we can do when we are faced with challenges and to talk about the Universal spirit that drives our optimism. Now I am not looking at the future through rose colored glasses; I'm giving you our perspective built on decades of knowledge and experience with our industries and a pragmatic view of what a company like Universal can do.

As the challenges of 2006 mounted, as we looked ahead to early 2007, we did what we do best at Universal. We turned on a dime. We tightened our belts and we started making moves that would help us through hard times and would make us even stronger when the good times returned. The first thing we did is we froze all officers' salaries and we'll re-evaluate that freeze sometime late in the second quarter to determine if and when it's time to lift it. But in the meantime, our Senior Team is leading by example. We'll begin an earnest evaluation -- we began an earnest evaluation of our people to make sure that we only have 'A' players on our team. We simply don't have the time to develop people who aren't up to our standards.

We stepped up our implementation of a broad and significant continuous improvement initiative. This is a program that borrows from lean manufacturing and other proven practices to make sure that we are the best value-producing, efficient organization we can be. Those are just a few of the things we did to make sure that we are smart and lean as we can be for our customers, our shareholders and our employees.

Let me tell you something about our senior leadership. Not one of them gave these moves a second thought. They lined up right behind the importance of a salary freeze, both for what it does for our numbers and for the example it sets. And they immediately looked to see if they could identify people who weren't giving us 110%, and they started the continuous improvement journey with enthusiasm and commitment, and that's why we are able to do what we do because we have leaders who have worked together and towards common goals for decades and persevere with integrity.

Now, let me review our markets and talk a little bit about -- and what we are doing to grow in each one of our businesses. Let me start with DIY Retail.

Consumer spending had a significant impact on our DIY and our sales in that market were off 24%. So we buckled down and studied our opportunities and started making moves that positioned us well for 2007.

As we look ahead, all indicators are that this market will see modest growth in the coming years with a stronger pick up after 2007, and there are a number of reasons for this. First, the existing housing stock is aging and needs repair and updating. People who aren't buying new homes will be repairing and refurbishing their older ones. Second, home ownership rate is high; nearly 70%, and homeowners spend more on their homes than renters. And third, the high level home sales over the past few years will drive spending since much remodel occurs in the first few years of ownership.

Those are the market bright spots, now let's look at what Universal's opportunities. Let's start with new business. We have significant new business booked for 2007. We've picked up new products, new markets and new customers throughout the country and we've seen our planning bear fruit.

For example, last year we bought GeoMatrix, a leading supplier of plastic lattice and we've picked up enough business in 2007, to sell the manufacturing capacity for the year.

Then there's our composite decking and railing product called Latitudes, it is also called Veranda at The Home Depot. And thanks to our business with our retailers and our new partnership with Boston Cedar, the New England distributor for our Latitudes products, we are over 100% of capacity of our new composite products and we are creating a game plan for growth beyond 2007.

We continue to introduce exciting products in our consumer products division, like our new foamed composite fence panels, our solar lit post caps, and balusters made of metals and of Tiffany glass. And as Bill mentioned, we are really excited about our pending acquisition of Aljoma Lumber, the largest and only manufacturer and supplier of treated wood to South Florida and also serve the Caribbean. This is an exciting entrée to an important and strong market for Universal and allows us to bring in other Universal products like all our outdoor living products to a market that we are not yet serving.

So you can see why we are excited about our DIY business for 2007; about growing our opportunities with existing customers and adding new stores and new territories to our business.

Now let's move on to Site-Built. You know in single family housing starts we were off by more than 41% in the quarter and it's really tough to overcome a decline like that. But we were able to gain share with products like Open Joist and Wall planters and we focused with success on our commercial and multi-family business, especially in the northeast where our framing business continues to see healthy performance and growth potential.

We are also focusing on engineered wood products. In slower times like these, builders are eager to learn how they can save time and money, and those engineered products are the key to their success and to ours.

There are some areas in the country like Texas where those engineered products aren't extensively used, and this gives us a strong opportunity to convert builders to them.

As we look ahead, we expect a few tough quarters this year. We are hearing from our customers and that many expect to have a pickup by mid to late 2007. NAHB is predicting that total housing starts will begin to increase throughout each quarter in 2007 and then into 2008. Others call for continued declines. We believe that any growth in '07 will be modest and we expect a stronger pickup in 2008. We'll focus on growing our business with current customers and providing them the opportunity to source from a single player.

We'll continue -- we'll grow in geographic areas that make strategic sense and continue to help builders nationwide cut costs and improve their home building processes in their homes through the use of engineered wood products. We'll focus on regions where homebuilding remains healthy and where we'll have a presence-- in portions of the mid Atlantic, the Carolinas, Texas and Georgia to name a few.

Now let's look at our Industrial business. You know this continues to be a bright spot for us. As we continue to see success and opportunity around every corner, more and more of our plants are getting involved in Industrial business. We continue to look at ways to increase our capacity and share in this highly fragmented market where we offer capabilities that others simply can't. As we faced capacity constraints we began looking for opportunities to add industrial operations in our plants throughout North America. In 2006 we started new operations -- new industrial operations in Texas, Florida, West Virginia, Tecate, Mexico, Minnesota, and Lansing, Michigan. We are adding capacity to meet the demand of our industrial products and we expect to open or expand industrial operations in plants in Florida, Georgia, North Carolina, Ohio, California and Texas in 2007. We are dedicating more and more resources to Industrial because we see nothing but opportunities for continued strong growth.

Now, let's move on to Manufactured Housing. You know, as Mike said the decrease in our top line sales for this market was due to lumber prices as well as the significant decrease in unit sales. Although it's important to note that the decrease of approximately 50% of shipments in the fourth quarter compares to an unusually strong fourth quarter in 2005, when FEMA purchased nearly 7,000 HUD code homes in the wake of hurricanes Katrina and Rita. We made a bold move to ensure the stability of the supply chain and to strengthen our long term position in the market. In the fourth quarter of 2006, we purchased Banks Lumber. Banks was one of the strongest competitors in the market place. It was well respected in the industry and had strategically located facilities that are now helping us reach our goals. And as we mentioned when we announced the purchase, this opens up the RV market to Universal and we are beginning to set up plants to devote to that one $100 million industry.

Based on the conversations with Manufactured Housing Institute, we expect that December's 2006 shipments will be approximately 51% lower than the previous year and we also expect the industry to announce a decrease of nearly 20% in shipments over the previous year to approximately 118,000 units. We don't expect to see a significant increase in production in 2007 and we'll continue to find a way to increase our penetration in the modular home market. We also look forward to moving into the RV market in this coming months and year.

So that's the business update and a brief outlook. We are optimistic about our book of business for 2007. We are optimistic that we made the right organizational adjustments to be a strong efficient machine. We are optimistic about the people who drive this company and our success, and are optimistic about achieving the goals of our growth plan and becoming a $4 billion company in the next four years.

We know and we understand there's four quarters in the game and when something doesn't go our way we don't panic and we don't get discouraged, we dig in and focus on what's in front of us. We know we have the right plan and the right players, and in the end we know we'll come out on top.

Thank you, Mike. Needless to say I am very proud of our people and our results in a difficult quarter and of course of turning in a strong year despite the tough ending. I'm also proud of the example of our leadership team has set, not just by freezing their own salaries, but by being the first folks to roll up their sleeves, face the challenges head on and to figure out what we need to do to succeed.

I've been at this company for over 36 years and I have seen us tackle challenges like these before and come out a stronger, better company. That's exactly what we are doing now and I see nothing but great opportunities for Universal Forest Products and our stakeholders in 2007.

I thank all of you for your interest and we'll now open the floor for questions.

[OPERATOR INSTRUCTIONS]. And your first question is from the line of Justin Thomas with Citigroup. Please proceed.

Morning, Justin.

Good morning, how are you today?

Fine, thank you.

Couple of questions for you, the first -- the original guidance for the year, that didn't contemplate the tax benefit, did it?

No, it didn't.

Okay and secondly on the acquisitions that you've made, are those similar operating margins to your existing businesses?

Yes they are.

Okay.

Collectively they are.

Okay, so collectively on the order of -- I don't know, let's call it round numbers 5%, 4 - 5% something like that?

Yeah, that's in the neighborhood.

Okay, so with the acquisitions basically adding $380 million to the top line in '07, that's really all the growth coming from there, that's your top line guidance increase basically?

Well, you know $380 million is a stretch on those two acquisitions. What really what we are doing is focusing on the game plan we put out for Goal 2010, where one third of our growth will be organic and two thirds of our growth will be through acquisition.

Justin, the $380 million is the sales that each of those companies had achieved in their year-ended July and September, and they've certainly felt the softness that we felt so those numbers would not be high if you looked at them currently.

Okay. But I mean I understand kind of round numbers about two thirds of that -- I guess where I'm going is that the rest of the business then is shrinking if I apply a 5% [off -M] to the revenues there. The rest of the business is shrinking on the order of a $0.40 EPS decrease year-over-year. Is that how you guys are --I think it's a little less than $0.40, but is that how you guys are thinking that it -- the rest of the business is shrinking and really all of this is coming from acquisitions?

We don't necessarily think its shrinking; the housing market is going to be tough for a couple of quarters. We really see some growth in the Industrial side of the business and the DIY side of the business.

Fair enough. And can you help us out in the first half -- I know you said first half tough second half, how tough are we talking in the first half, similar to what we saw, minus 23-24% decrease in revenues in the fourth quarter?

You know what's hard about the first quarter is the weather. It's brutal right now, I don't know where it is where you're sitting but you've got the whole Northeast, the Midwest all the way out through Colorado it's frigid, there's nothing going on when it goes through and we get decent weather, then we can give you a lot better -- a lot better feeling.

Okay, thanks guys.

Your next question is from the line of David Leibowitz with Burnham. Please proceed.

Good morning.

David.

Good morning.

Morning, Dave.

Very briefly, your last comment in the press release for '07 looking for a 10% gain without the tax items, what does the number per share look like without those tax items?

For the year or for the quarter?

For the year.

You want to back out $3.4 million for the earnings for the year.

That's all?

That's correct. The tax adjustments were $3.4 million net, bottom line spec for the year.

Okay, and then I add 10% to the result and that is the unofficial target for this year?

Yes, 5 to 10% from that base number, that's correct, David.

Okay, that's excellent. Second of all, the acquisition that is still to close next week, the larger of the two, what is your return on investment come out to on that transaction?

We use a hurdle rate of 12% when we are evaluating our acquisitions and you know, it's our goal to achieve those over time.

And would this be accretive for the full year '07 or this has become accretive in '08?

No, it's certainly accretive for '07.

Very fine thank you. I'll get back and queue in let somebody else ask a question.

Thank you, David.

[OPERATOR INSTRUCTIONS] Your next question is from the line of Charlie Jobson with Delta Partners. Please proceed.

Hi, Charlie?

Hi there. Little bit of a specific question but can you -- on a previous call you mentioned there was a -- in the Panamanian market a shortage of I think 400,000 housing units, could you talk a little bit about the opportunity down there?

What market were you talking about?

I thought I read in a conference call that you were involved in shipping stuff down to Panama, I might be wrong on that.

No, we're not -- we're not. We are looking at some opportunities in Panama, we are looking at some other opportunities, but we are not involved in any business down there now.

Okay sorry about that.

No problem.

Your next question is from the line of Keith Johnson with Morgan Keegan. Please proceed.

Good morning.

Morning, Keith.

Hi, Keith.

Hey, just a couple of quick questions. When you were talking about the price volume changes, I didn't -- I don't think I wrote down the Site-Built, overall it was down 22% for the quarter, what was the volume in price on that?

Site-built was mostly units. Prices were down 3 to 5%.

Okay and what about I guess trends by region in the Site-Built, were there certain areas of the country that showed more of a decline than others as you came through the December quarter?

Yeah, we saw -- you know obviously California was very difficult for us, we saw a little bit of slowdown out in the Baltimore/Washington area, Florida had slowdown quite a bit and certainly Denver, Colorado was as bad as any market in the country.

Okay, and what about the overall kind of Midwest market, how was that?

Well, the Midwest has been down so long I forgot to mention it, the Midwest is terrible.

Okay, and now you've spoken -- talked about the Aljoma acquisition, could you give us any kind of idea on the purchase price, purchase price range, since it's not officially closed yet?

Yes, we have. The purchase price is about $53 million for the common stock of the company.

And most of their business is all kind of South Florida is there a breakup on how much, kind of Florida versus the Bahamas -- in those markets?

The majority of it is South Florida, they ship somewhere in the neighborhood of 15% to 20% into the Caribbean.

Okay, I guess just one last question on the declining SG&A and where I guess within the existing -- from the existing business, are those remained a driver in that area?

You mean driver in the declining SG&A?

Yes.

Bonuses and incentive compensation was the biggest driver, also salaries and wages.

Okay, thanks a lot.

Even though the year ended up better than the previous year in terms of total earnings, our return on investment -- our return on capital was not as good. Consequently, our bonus pool percentages that goes to management moved down with the ROI movement down.

And your next question is from the line of Greg Halter with Great Lakes Review. Please proceed.

Good morning everyone.

Morning, Greg.

Good morning, Greg.

I wondered if you and I know you have plenty of plans but I wondered if there is a way to gauge your capacity utilization by the four segments.

Well, we have got a lot of capacity in Site-built right now so we've got a lot of capacity in Manufactured Housing but we are in pretty in shape, industrially we got add a lot of capacity. Mike told you our component plant we are going to have to add capacity and our DIY business we really made some big strides this year, we got a lot of new business so we are probably in pretty good shape there also.

Okay, and in the quarter, can you comment on how much the acquisition of Banks in particular and I guess all in total although the biggest one added to the top line?

We hardly had them for --.

It was a much for the quarter, Greg.

Okay, small. Okay, and looking at the income statement I noticed that the minority interest line had a fairly large year-over-year swing for the fourth quarter, can you comment on the change there?

What happens on that line is for the business that we don't entirely own or we are a minority partner, their share of the earnings gets tucked into that line item and those operations did very well this year.

Okay.

In particular our Framing operation in the North East as well.

And in particular the fourth quarter I would presume then?

In the fourth quarter as well.

Okay.

They had a very solid year.

And finally, I noticed or I don't think there was any share repurchase or that -- any comment, just wondering if you could bring us up to date on your plans or thoughts regarding the share repurchase program.

We have 1.5 million shares that we are still authorized to buy back, Mike Glen and Mike Cole and I had a discussion on it. We decided at what level we would come -- we would came in at, if it was necessary, it did not get to that level and then we got into some acquisitions where we couldn't repurchase so consequently we have done nothing there and we still can't until the Aljoma thing is through.

Okay, thank you.

And your next question is from the line of Jason Loeb with Lord Abbett. Please proceed.

Hi, Jas.

Hi, Jason.

Yes, hi guys. Just a couple of questions, I was wondering if you could expand a little bit on your value proposition in the Site-Built area given this down turn, have you seen conversations change, accelerate, if you can just, kind of, talked about that a little bit.

Give us the question one more time.

Regarding your value proposition to Site-Built on the component side, kind of looking at it from the labor cost prospective, have you just seen any increase in conversations with the builders given this downturn that we are in right now?

You know, that is a good question and I will try and give you a candid answer. When these big home builders had backlogs into the millennium, and they are only -- what they were trying to do is monetirize their land, all they wanted to do is build what they had designed and build it the way they were used to building it. Now every single major builder is out looking for ways to trim costs, ways to take time out of the cycle and we got a lot more interest in engineered components in conversion to components and in the engineered wood side of the business that Mike Glenn was talking about. So, yes we have seen some definite increase in activity. As a matter of fact our Open Joist product line is getting some really nice market share gains.

Okay, great. And in that, can you just talk about some regions where the labor issue kind of did not do well for your business as taking into consideration Texas, for example, has been a difficult market because of the labor situation. Any changes there?

We have converted -- we have converted a lot of the builders in Dallas, we have converted a lot of the builders in Houston, we continue to have success converting the stick-type builders and we look for that to be a nice added value for us to be able to grow the business in those markets.

Okay, great. On the do-it-yourself side, can you expand a little bit on -- you have talked about new products and new customers and new businesses there. Can you just break that down especially on the new business relationships?

Yes, Jason. There's a couple of things we did this year. We looked at some markets where we needed to get -- we needed to fill our plants up and get some good volumes so we targeted three markets and we picked up from a pressure treated standpoint, we picked up about 73 stores with one of our big customers. That will really fill the volume in from a treating standpoint.

We sold out our Plastic Lattice, the acquisition that we made a year ago, again that was probably in the neighborhood of 400 to 550 stores that we moved that product into.

The composite expense that we came out with, is a new innovation, a new technology and a new innovation and how we put it together and although we are only going to produce a limited amount this year we sold all that also.

We have also come out with some new post caps that we were at a show just last week in the North East and it was a rave of the show on this new product. Right now from a retail and DIY standpoint, we are making inroads in all markets across the country with the majority of the products that we manufacture and distribute.

Okay, great. Over the last couple of years you have walked away from business, just taking a look at Home Depot because of pricing, is that dynamic still the case or is that stabilized?

You know, we grew our business with -- we will grow our business with Home Depot in 2007 significantly. We continue to work our way to take costs out of our plants and it gives us a very powerful and strong competitive advantage and we are able to grow and really, especially this past year maintain our margins.

Great. And finally, just looking at the SG&A line. Given the continued weakness throughout '07, what improvements upon what you've improved in '06 can we expect?

Well, I think the things that Mike had mentioned earlier about the key player evaluations and the officer freezes should improve SG&A on the magnitude of about $2 million.

Okay. Alright, great, thank you.

Thank you.

Thank you.

Your next question is from the line of Frank Bisk with Pilot, please proceed.

Hi, Frank.

Hi, Frank.

Hi, how are you?

Great, Frank.

I have a question, and I missed part of the call so forgive me, in terms of if we were just to look at I guess your guidance of -- I think you said sales up 5 to 10% in '07, if we were to I guess 'X' out acquisitions, what would the clean number be down, you know I'm just --?

You want to know our unit sales for the quarter or for the year, Frank?

No, I just -- for your guidance for the year, you say--.

10 to 15%

Oh, 10 to 15, sorry, yes 10 to 15, my mistake.

10 to 15.

If you -- if we never heard of acquisitions, what would that number be, down 5, down 10 or--?

We are saying that acquisitions are accounting for most but not all of the growth for next year.

So it will be flat to slightly up even, okay good. Thank you.

You bet.

Your next question is from the line of Greg Halter with Great Lakes Review. Please proceed.

Hi, Greg.

Hello again. I wonder if you could just provide the percentage of your sales for the year of 2006 that went to Home Depot.

Yeah, it's about 21-22%, Greg.

Okay, thank you. And then finally on the treated lumber side, I know you've had some contracts on the raw materials stance and just wondered if you could comment on what you see there? I think some of these raw material costs have come down, but just wanted to get your thought process there.

Yes the -- that really doesn't bother us much because our timing -- we time our buy with our sell, so the -- and we try to make a fixed profit per unit so the commodity market in terms of our profitability doesn't really affect us whether it's high or low. The only thing it does do is it makes our sales dollars move around.

Okay.

And then we are maintaining the same strategies with our primary producers that we've always had with vendor managed programs and timing our sale to our buys.

Okay thanks.

And your next question is another follow up from the line of David Leibowitz with Burnham. Please proceed, sir.

Thanks. Very briefly, how much free cash flow might you be able to generate in '07?

Well, free cash flow for us is net earnings and depreciation and amortization is pretty much offset to maintenance CapEx, David. So if you look at the net earnings number, that pretty much gets you there.

Excellent, thank you very much.

You bet.

There is a follow-up question from the line of Jason Loeb with Lord Abbett. Please proceed.

Hi there, one last question. Given your cash flow characteristics and the fact that looking at your debt ratio has continuing to come down, what would it take for you guys to start levering up your capital structure?

Well, after the Aljoma acquisition the capital structure will look different, that ought to add 8 to 10 points to our debt to Cap ratio.

Okay, and that's pretty much where you feel you are comfortable at?

Well, it's getting in the neighborhood and then we still have other acquisition opportunities that we are evaluating.

We still have four or five deals that we like and we like where they are and we like the products they are in and we like the geographic distribution, so you'll probably coming out of us in that area.

Just a magnitude of size, on those four or five deals that you are looking at.?

Just like always, over $10 million and probably less than $100 million.

In the typical range of what we are doing.

Okay, thanks a lot. Good luck.

Thanks, Jason.

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

Okay, thanks all for your attention and for your interest in our business. We appreciate your loyalty and we're going to get back to work and make sure that we hit our targets for next year. Thank you very much.

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