UFP Industries Inc (UFPI) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Q2 2007 Universal Forest Products Earnings Conference Call. My name is Rob and I will be your operator today. Throughout this conference, all lines will be on listen-only. (OPERATOR INSTRUCTIONS).

At this time, I would like to turn the call over to your host, Ms. Lynn Afendoulis.

Good morning and welcome to Universal Forest Products second quarter 2007 conference call. On the call today are William G. Currie, Executive Chairman, CEO and President, Michael B. Glenn, and CFO, Michael Cole. Please be aware that any statements included in this call that are not historical are forward-looking statements within the meaning of 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 on assumptions made by and information currently available to the Company at the time such statements were made. The Company does not undertake to update forward-looking statements to reflect facts, circumstances, assumptions, or events that occur after the day the forward-looking statements are 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. Among the factors that could cause actual results to differ materially are the following, adverse lumber market trends, competitive activity, negative economic trends, government regulations, and weather. 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. At this time, I would like to turn the call over to Bill Currie.

Hey, good morning, everyone, and thank you for joining us for our second quarter 2007 conference call. We told you the second quarter was going to be tough and it was. It was even tougher than we thought it would be. But I think there are three takeaways you should get from this conference call. Number one, our balanced business model works; number two, the housing recession is deeper and broader than we anticipated, and it has affected other markets; and three, we told you we would grow our other three business segments through this downturn, and that's exactly what we did. Mike will talk more to you about our performance and strategy for the future in a few minutes, but first I'll turn the call over to Mike Cole for a review of our numbers. Mike?

Thanks, Bill. 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 quarter declined by 6%. We estimate this was comprised of a 1% increase in unit sales, offset by a 7% decline in our overall selling prices due to a soft lumber market. Reviewing by market, our sales to the DIY market increased 2% compared to the second quarter last year, resulting from a 9% increase in unit sales, offset by a 7% decline in selling prices.

Acquisitions since the second quarter of 2006, contributed all of our unit sales growth this quarter. Sales out of existing facilities were flat with last year, in spite of challenging market conditions, as a result of a significant market share gains we realized with big box retailers. Our sales to the big boxes increased 10% during the quarter, while our sales to other retailers, whose businesses is more closely correlated with housing starts was off 19%.

Our increase in sales to the big boxes was less than we expected, however, which we believe was caused by a decline in consumer spending on large home improvement projects. Our sales to the manufactured housing market increased 4% for the quarter, due to a 14% increase in unit sales offset by a 10% decline in selling prices. Our acquisition of Banks Lumber drove our unit sales growth this quarter and made up for very soft market conditions. The industry reported a decrease in HUD code production of approximately 19% in April and May.

Modular market was off 20% in the first quarter and our sense is that this trend continued in the second quarter. Our sales to the site book construction market decreased 30% this quarter, due to an 18% decrease in unit sales out of existing plants, a 4% decline due to our decision to exit the Las Vegas framing market, and an 8% decrease in our average selling prices. The general condition of the housing market has made its impact on all of the regions we sell, but most notably in the Midwest, Southern California, and Colorado. Single family housing starts for March through May were off a reported 24%.

Finally, our sales to the industrial market increased by 7% for the quarter, primarily due to aggressive sales efforts resulting in a 10% increase in unit sales, offset by a 3% decline in pricing. Unit sales growth picked up this quarter as a result of continuing to add many new customers, which helped offset the affect of a decline in sales to certain of our customers that supply the housing market.

Moving down the income statement, our second quarter gross margin decreased to 13.2% from 14.6% last year and our gross profit dollars decreased almost 15%. These declines were primarily due to a combination of lower unit sales out of existing plants and fixed manufacturing costs and greater pricing pressure on the site build market. Selling, general and administrative expenses decreased by approximately $400,000 for the quarter. Acquired operations caused our SG&A to increase by approximately $4.5 million, but this was offset by a decrease in SG&A expenses of existing operations and operations we closed this year of approximately $4.9 million.

Moving on to our cash flow statement, our cash flow from operations decreased by $43 million compared to last year, primarily due to a decrease in net earnings and the affect of our sale of receivables program on our cash flows. Specifically, in the first quarter of 2006, a new program was completed and we had sold receivables totaling $50 million in that period. That year we had amounts outstanding on the program at the beginning of the year and sold an additional $23 million in 2007. Therefore, the sale of receivables program generated an additional $27 million of cash flow in 2006 versus 2007 simply due to timing. Our year-to-date capital expenditures totaled over $19 million, including real estate purchases totaling $2.5 million. We're still planning on total capital expenditures for the year of $40 million. Business acquisitions for the year include Aljoma Lumber for $53.5 million, Perfection Truss for $1.3 million and another 5% interest in Shawnlee Construction for $1.5 million.

Finally, we repurchased 45,000 shares of common stock during the second quarter and we have board authorization to buy back up to 1.4 million additional shares. Once our trading window opens, we will resume buying back stock. A few points I would like to make about the balance sheet. First, our total interest bearing debt at the end of June increased to $247 million versus $171 million last year as a result of acquiring Banks Lumber and Aljoma Lumber. Included in long-term debt was $93 million outstanding on our five-year revolving credit facility, which has a remaining availability of $170 million. And our leverage ratio increased to 31.4% from 26% a year ago.

I'll conclude with a review of our revised targets. As a result of challenging market conditions discussed in our press release, we've revised our targets for the year to net sales of $2.375 billion to $2.425 billion and net earnings of 40 to $42 million. This implies a six-month target for net sales of $1.05 to $1.1 billion and net earnings of $19.3 to $21.3 million for the remainder of the year.

Our new targets assume challenging market conditions continue in not only housing but in DIY and manufactured housing that we will continue to achieve market share gains in our DIY, Site-Built and Industrial markets. We already have a strong market share position in manufactured housing, and we will evaluate plant consolidations and closures and any actions taken in this regard will be temporary in nature, resulting in no asset impairment charges. The lumber market will continue to be the press for the balance of the year and will incur incentive compensation expense at a rate in-line with our historical experience. That completes my comments on the financials. Bill?

Okay. Now we'll turn it over to Mike Glenn for our business outlook. Mike?

Thanks, Bill. If I've said this once, I've probably said it a thousand times over the past three months. The housing market is sick, Florida is terrible, California's not far behind, we're struggling in Colorado, and the Midwest -- well, the Midwest is the Midwest. It hits deeper and wider than anyone anticipated. And the downturn is lasting a lot longer than anyone anticipated. On top of that, the ripple affects are wider than anyone predicted. And we're not looking for a recovery until late 2008. In the meantime, this downturn will continue to hurt builders and suppliers who are tide only to housing. But I don't want to mislead you, it's hurting us too. But fortunately, we have a business model that allows us to focus on other opportunities and strategies that will make us stronger in all markets. Our stories are in the numbers. Our site-built sales were down $69 million for the quarter, yet our total sales were only down $49 million. That tells you how bad housing was for us and how well we're doing in our other markets. We've picked up significant new business with the big box retailers, we're picking up our share in each of our markets, and we're embarking on new, exciting business opportunities, and we're focused on a lifelong continuous improvement journey, intended to make sure that we're as lean and efficient as we can be. And not just for the near future, but for decades to come.

Let me review our performance in our markets and talk a little bit about what we're doing in each to grow our success. I'll start with the toughest area, site-built construction. As I said the news in this market is tough. Our sales were down $69 million for the quarter. The site-builder is responsible for almost all of our drop in earnings. Looking at the industry as a whole, housing starts for May were down nearly 27% over a year ago. In June, the NAHB housing market index, which is a monthly builder survey on future condition dipped to its lowest point in ten years. Every day we hear news about devastating losses from another builder.

Our plants have strong backlogs and early in the year those backlogs gave us modest confidence for the balance of the year. However, these backlogs did not translate into orders, because historically housing developments that would call for 90 to 100 homes and they would release those, they're now only releasing 9 to 10 and they're turning into orders. The homes simply aren't being built. Even areas that were bright spots for us, like Texas, are starting to see a slowdown and certainly the rain for the month of June didn't help us. The short-term outlook isn't promising, but when the market returns, we'll be strong and ready for growth and success.

The mortgage banker's association is forecasting a 22% decrease in total housing starts for the year, including a 25% decrease in single-family housing starts. In NAHB forecast numbers last week were very similar. Based on our backlogs and our conversations with our customers, we're hoping for a recovery in this business in late 2008. It's important to note that much of our backlog business is booked at lower margins because we've had to make price concessions to our customers. So it's going to be a while before the strength of the market is fully returns. We continue to focus on getting the sale, looking at multi-family and commercial opportunities where they make sense, and showing builders how we can enhance our efficiencies like, like products like our Open Joyce and maintaining strong relationships and performances so we can remain the supplier of choice when the market returns.

Now let's look at the DIY/retail segment. Retail sales this year, to be honest, didn't meet expectations. Despite a strong end to the last quarter, sales really didn't climb as we expected. We had high hopes for this business, we had -- we knew in advance, because we had written up about $100 million worth of new business with the big box and quite honestly, those sales just aren't happening like we anticipated. We believe that homeowners have taken a significant equity out of their homes and a decrease in their value and are putting off a lot of their large remodel projects like room additions and new decks. Fortunately, like we said, we picked up significant new business with the big box customers and our sales of value-added products like deck accessories, plastic lattice, and vinyl fencing have allowed us to see healthy sales' pickup in some regions. Our consumer's products remain a bright spot. Sales of our composite products remain strong and we're confident that we'll continue to take share of these products. We've even begun to ship some of our composite products to France, to Ireland, and the U.K. While it's not huge business, it will open up the door for opportunities for us to sell our post caps, our baluster, and other complementing products. As demand for our composite products grow we continue to look to ways to improve our throughput and our capacity and explore other expansion opportunities down the road.

Currently, industry expectations are for 2007 and much of 2008 to remain tough for retail. Given the impact on housing market. However, we believe the long-term outlook remains very positive. We believe that business with the big box customers driven by demand for our consumer's products will be strong in the third quarter and we're confident in our opportunities for growth and success in years to come.

Now let's take a look at manufactured housing. This market continues to be soft, but for the first time in a long time, our plants have backlogs. And this is going to take us deep into the third quarter, so we're cautiously optimistic. We continue to look for opportunities to move deeper into the home with products like interior doors and millwork. This provides opportunity for growth as we maintain a commanding share with the products that we've traditionally offered to this market. While we've been pleased with the integration of the bank sales and operations, we still have some work to do with the consolidations.

Now let's look at our industrial. This is still a very bright spot for Universal. Last quarter we added 16 new customers that had over $1 million worth of sales. One of the exciting things that we're beginning to see happen, which we had predicted, is that our regional successes are now exploding into national opportunities. And national account customers have tried us in one area of the country are now asking their other areas of the country to pick us up and expanding our operations nationwide. We're beginning to see the benefits of this new business in the fourth quarter of this year. Our second quarter was impacted by a decrease in business from industrial customers that were linked to housing. Customers who make doors, bathtubs, windows, air-conditioners and other housing-related products. But we continue to add large customers whose business isn't housing-related, such as IBM, and these are going to minimize the impact.

Looking ahead, we continue to see great promise and opportunity for strong growth in this market. We're adding capacity in many plants and increasing our sales power because of the opportunities are abundant. As we talk about opportunity, we've just started working on a new market that holds great potential for us; it's the concrete forming market. This area will supply wood forms to company's that build structures of concrete. It's much more than just suppling basic ply-wood. We're producing special forms and trusses to hold concrete in place as it sets for intricate structure such as bridges, parking garages, hotels, and other commercial structures and infrastructure projects. We believe that this market has an annual value of over $1 billion and we believe that we can earn a significant percentage of that business. We bring to this market the same advantages that we bring to the industrial market and we see many of the same opportunities. There are no national players, the projects and products that require the same expertise, equipment, and resources as our other operations, and we can offer manufacturing, design, and sales expertise that no other suppliers can really offer. And we can leverage our vast purchasing power to benefit our customers. Yes, this is something we're really excited about and our first few products has given us many reasons to be optimistic about the future.

So that's a business update and outlook. The quarter was tough and was really hampered by a sick housing market. Despite that, we saw market share gains in each of our four markets and sales increases in three of them. We're benefiting from new business with big box customers and we're confident we will continue to drive strong business in the DIY/retail. We have backlogs and manufactured housing for the first time in a long time and we're very pleased with our position in that market. We continue to realize growth and opportunity in our industrial business and we're adding capacity where we can. We're excited about new opportunities and new products for DIY and manufactured housing and new customers and products in industrial and an area that's new to Universal, concrete forming. We're doing the Universal thing. We're pushing hard for every bit of new business and every opportunity to make sure we're strong and as efficient as we can be. And we're putting a lot of effort into the continuous improvement journey and we're energized by the ground swallow support and encouragement from our people. And the Universal people are driven to do what they can and what's necessary to grind through tough times and to drive our company toward success and the next phase of growth and opportunity.

Thank you, Mike. You and your team are creating success in some of the toughest markets that I can remember. Everyone is concerned rightfully about the housing market. Fortunately, we can be optimistic about our future because of our leadership team, the buy-in of our employees, and because of the truly unique business model that has proven its strength through many tough market conditions. I thank all of you for your interest and for your support of our company and now I'll open it up for questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Sir, I have your first question today coming to you from Mr. Michael Cox calling in from Piper Jaffray.

Thanks a lot for taking my question. I was wondering if you could comment on the factors that drove that 10% increase at the big box, retail channel, was that incremental shelf space with existing business or was that tied to some of the acquisition activity?

The unit sales increase for the big boxes was in the 13, 14% range. About half that was -- about 6%, I think, was acquisition and the balance was market share gains with them through existing plants.

Okay, that's great. I was wondering if you could provide a progress update on the lean initiative? I know it's an ongoing journey but any quantifiable impact we could see as we look through continuing challenging end market conditions?

I think we mentioned last time; a lot of the benefit from this continuous improvement is going to be seen in creating space in our plant so we can put up new work cells to drive some new products. I think you're going to see some of that happen in the fourth quarter, third quarter next year as we get through this journey. The other part of it that we're seeing is we're really reducing a lot of our width. You'll see our overall inventory levels come down dramatically here in the third and fourth quarters.

That's excellent. My last question is somewhat of a philosophical question related to share repurchase activity. You're looking on a debt to EBITDA basis; one could certainly argue that you guys are under levered. I'm wondering what your thoughts are on taking on incremental debt to repurchase stock at these depressed levels? Thanks a lot again for taking my questions.

We will, as soon as our window opens back up, we will be back in the market buying back our shares. We told you that was a priority for us. We've been doing it opportunistically and we will be back in the market repurchasing shares.

Thank you. Sir, we're going to go to Steve Chercover from D.A. Davidson.

Hi, Steve.

Hi, Steve.

Good morning, Steve.

Good morning, everyone. A couple quick things. First of all, maybe on the concrete forming, will that look like a new segment to you, or will you put that industrial. And you said it's a $1 billion opportunity. Do you have to reach out to each of those concrete companies, or how do you approach that market?

It's a good question, Steve. We're going to put that in our industrial group. Obviously, we'll track it individually for a while to see what our progress is. Right now the sale of that is mostly going through subcontractors.

Okay--.

We are doing some of these sales right now today, Steve.

Steve, I think it's important to know this just wasn't a half hazard attempt at a new market. We have taken one of our best sales managers and he is now focused on that market and we brought a whole team of salespeople and industrial specialists in and they've gone through complete training on all the products and in all the manufactured products that have given them the market knowledge that they need to have. It's a very serious attempt and it's already showing, we don't give out the numbers but it has already showing millions of dollars of sales increases for us.

It seems very logical given your infrastructure and your expertise. So congrats on that. Switching gears a bit, just for modeling purposes. Should we look at the second half of being the mirror image of the first half with Q3 kind of similar earning's numbers to Q2 and then a weaker fourth quarter?

The comparisons in Q4 are certainly easier so you're going tonight to take that into consideration when you model Q3 and Q4 separately.

Got it. And given what you've said in terms of focusing on share repurchases, does that kind of imply that acquisition opportunities simply aren't as compelling as buying your own stock? Does that have any implications for your go to 2010 initiative?

Steve, there's a lot of companies for sale, but believe it or not the valuations just aren't quite in-line yet. So share repurchase will therefore continue to be a priority for us.

We have a lot of opportunities for acquisitions. We have a pageful, but just like Mike said, we're not going to overpay and we really think a little deeper into this housing recession that we'll be able to buy the companies that we want to be at a much lower multiple or even at an asset value.

So do you figure you can still hit $4 billion in sales by 2010? Is that realistic?

That hasn't changed.

We haven't revised that.

Got it. Okay.

And we think that the opportunities are still going to be there. There's still some (Inaudible) markets we need to be in and we're actively looking in those markets. Okay. So the long-term objective, or the intermediate term objective is not derailed by this short-term -- No, I think --

You're right. It's a short-term little blip but long-term we're still focused on $4 billion and growing each one of those segments.

Great. Thank you.

Thanks, Steve.

Thank you. We're going to go to Carl Reichardt from Wachovia Securities.

Good morning, Carl.

Just back on the forms business again. How do you look at that business now in terms of the split between residential and commercial construction or however you guys would want to define it. I understand these are more specialized forms for larger concrete work but how do you--- can you give me a sense of also who is in that business? Is it largely regional providers or how does it break out?

There is no national player, there is a couple regional players that are reaching out, but we're not talking about going to single family folks, we're talking about highway construction, bridge construction --

Parking ramps.

-- stadium, waste water treatment. It's a whole different look for us -- business than we've ever gone after before.

And so we're thinking about this as largely industrial public construction, commercial, and since the residential business is effectively, I'm guessing fairly commodity oriented and poor now anyway.

Correct.

Do you need to add capacity to services business; can you fill it with existing capacity in the short run?

Yes. We believe we can fill it within our plants.

All right. Fair enough. Then, Mike, give me a sense as to -- although, I think I know this. A couple of the residential markets you mentioned as weak and continuing to be weak, but where in particular do you think the most important opportunities where you guys would need to go to take advantage of whenever housing recovers. What are the two or three metros that you're most interested in for residential?

We're not in Arizona right now, and that's certainly an area we believe we need to be.

Seattle/ Portland.

We're not in the Pacific northwest. We need to get up into Seattle and Portland area. Those are two areas that we continue to look at.

Okay. Terrific. Thanks so much guys.

Thank you. We're going to go to Mukul Kochhar from CIBC World Markets.

Good morning. I wanted to get an idea of presumption of lumber prices in your guidance and revenue for the second half? Are you assuming them to be flat from here or down year over year further?

Flat.

Yes, flat. They're at the depressed levels now and we're expecting them to stay depressed through the balance of the year.

All right, fair enough. Secondly, I'm trying to model this out. You did $1.3 billion, roughly in sales in the first half and mid-point of your guidance is roughly $1.07 for the second half. That's a significant decline from the first half from the second half in sales. How do I think about that?

DIY, you get a big selling season in the second quarter for DIY. You don't have those same type of sales in the second half.

Secondly, on the incentive compensation, now that your profit projections are a little lower than before, are you presuming some sort of a write back in the second half?

Yes. What we've incorporated in the model is a much lower incentive capitalization expense versus last year. That's right.

All right. And lastly, on the acquisition contributions, can you give me the figures for DIY and manufactured housing segments?

Yes, for the DIY, we had 7% -- excuse me -- the acquisition contributed to all of our unit sales growth in the quarter. So our units were up 9% entirely due to acquisitions.

All right. So the organically how much was down how much by --

Organic was therefore flat.

Got it, got it. And in manufactured?

In manufactured housing, our unit sales were up 33%.

And how much of that was acquisitions?

Our existing plants were down in-line with the market about 19%. So the balance was acquisition related.

Thank you very much. Appreciate it.

You bet.

Thank you. We're going to go to Jason Rogers calling in from Great Lakes review.

Hello. With home depot getting out of the commercial business, does that have any impact on Universal?

You mean the Home Depot supply?

Right.

It certainly takes away what could have been a potential train wreck as they were moving into some site build plants.

Okay. So that's --

So it's a positive they sold it for us.

Okay. And the concrete form business, what type of margins are you seeing in that business?

We don't give out margins by segment.

Okay.

It would be a higher margin business, certainly, though.

It would fall within our industrial margins.

Okay, thanks.

Thank you. We're going to go to David Leibowitz calling in from Burnham.

Hi, David.

Good morning. A few brief questions, if I may. Nothing was said about the RV market, which was something you had stressed with one of your acquisitions. Is there anything to discuss there?

David, it's still a soft market and a very, very competitive market. We are making some small inroads on it. We do have an individual that is totally focused on that, but we don't have anything really major to announce. But we are staying with the plan that we talked about two quarters ago.

Okay. Secondly, when we do come out the other end of the housing slowdown, will your margins recover to where they were, or might margins actually be higher?

It takes a long time to get those margins back up, but we'll eventually get them there. We also believe we'll probably have fewer players in the market when this thing turns around also.

So then we're saying that '09 would be the year to point to? Or would it be a year after that in '010?

No, I think '09. I think you'll see margins creep up in the middle of the year in '09.

Excellent. Thank you very much.

Thanks, David.

Thank you. (OPERATOR INSTRUCTIONS) Sir, your next question will comes from Jay McCanless from FTN Midwest.

Hi, Jay.

Good morning, everyone. My first question is on manufactured housing. You said your backlogs were up. It sounds like they're up pretty strongly in the banks plant. I wanted to ask if that increase in backlog had anything to do with the plants that you converted over to industrial? Is it just less plants, the same amount of business, or is there really a pickup in orders from your customers in.

There's a pickup in orders from our customers and the orders are spread beyond just the banks acquisitions, this spread to our core plants that we had prior to that.

Okay. What is your sense of that market now? Have you seen further plant closures by customers, or is everyone kind of hanging on to their capacity right now?

They're pretty much hanging on to capacity right now.

Okay. Then on the industrial business side, I know that you said earlier valuations for potential acquisitions still seem a little rich, but was going to see if industrial looked any better than potential acquisitions in your other sectors?

There's not as many opportunities for large industrial acquisitions for us. We've had a couple and the valuations have been too high.

Okay.

Those are -- who we're compete against there are much smaller companies and so the size of them are pretty small.

Okay, okay. And then on the debt side, should we expect further reductions to your overall long-term debt as we saw here in the second quarter?

Absolutely. Our revolving credit line is about $93 million right now. A lot of seasonality is still on the line, and that will come down pretty heavy in the back half. Receivables and inventory will also come down.

Okay. Final question, can you give me the unit sales increase by segment again?

Yes, I can. Unit sales increase in DIY was 9%.

Okay.

7% decline in sale prices. Unit sales increase in manufactured housing, 14% with a 10% decline in sale price. Again, within that 14% increase in unit sales in manufactured housing, our existing plants were down 19% in-line with production and then acquisitions drove the 14% increase.

Okay.

Site-built construction, units were up 18 out of existing plants, 4 as a result -- plus 4 as a result of our decision to exit Vegas framing and our sale prices were off 8, and then for industrial, unit sales were off 10, and sale prices were off 3.

Okay, great. Thanks, guys. Have a good day.

You too.

Thank you, sir. As there are no further questions, I would like to turn the call back to Mr. Currie for closing remarks.

Okay. I want to thank everybody for their interest in our company and participating in the call. We appreciate your support and now we're going to get back to work and make sure we make you proud of us. Thank you very much.

Thank you, sir. Thank you, again, ladies and gentlemen. This brings your conference call to a close. Please feel free to disconnect your lines now at any time.