UFP Industries Inc (UFPI) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Universal Forest Products, Incorporated earnings conference call. My name is Dan, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end 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 your host for today's call, Ms. Lynn Afendoulis. Please proceed.

Good morning, and welcome to Universal Forest Products' third-quarter 2008 conference call. On the call today are Executive Chairman, William G. Currie; 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 21-E of the Securities and 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 that was currently available to the Company at the time such statements were made. The Company does not undertake to update forward-looking statements to reflect circumstantial assumptions or events that occur after the date the forward-looking statements are made. Actual result could differ materially from those included in such forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties.

Among the factors that could cause actual results to differ materially are the following. Adverse lumber markets, 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.

Good morning, everybody, and thanks for joining us on this exciting conference call. Hey, this is not the kind of quarter that we like or that we're proud of or that we're used to; but if you take a look at our performance against the competitive landscape, Universal has outperformed its peers in spades. We've got a very solid balance sheet. We're continuing to generate good, positive cash flow. We're growing our market share. We're taking care of our key people and our customers, and we're focused on all the right things that will get us through these turbulent times and will get us to new prosperity when the markets and economy start to heal. We missed our targets; but targets are no longer reliable when everything is crashing around you. There's no way to provide accurate forecasts.

We can only keep our nose to the grindstone and focus on the things that count -- on our inventory, our receivables, our operating costs, our selling prices, and other things that we can control, manage, and impact. And that's what Mike Glenn and his team have been doing. They're doing all the right things to bring us through these tough times and to get us the strong operating profits and growth again in the future. Mike Glenn will run us through the business. But first, I'll ask Mike Cole to take us through the numbers. Mike?

Thanks, Bill. I'll get things started by reviewing our income statement for the quarter. As you noticed in the press release, our total net sales for the quarter decreased by 10%. We estimate this was comprised of an 8% decrease in unit sales and a 2% decline in overall selling prices. Reviewing by market, our sales to the DIY market decreased 6% compared last year, due to a 4% decline in unit sales as a result of the effect of the housing market on our customers whose business is closely correlated with single-family starts and a decline in consumer spending impacting our big box customers. Our sales for the manufacturing housing market decreased 23% for the quarter, primarily due to a decrease in unit sales. HUD-code shipments were off 17% in July and August, and modular production was off 34%. Our sales to the site-built construction market decreased 24% this quarter, due to an estimated 18% decrease in unit sales and a 6% decrease in average selling prices due to continued pricing pressure. By comparison, single-family housing starts were off approximately 39% for the period versus last year.

In previous quarters, we have been able to mitigate some of the challenges of the single-family market on our volume by pursuing multifamily and light commercial business. Finally, our sales to the industrial market increased by 5% for the quarter, primarily due to a 3% increase in unit sales and a 2% increase in average selling prices. Unit sales growth this quarter was the result of acquisitions and continuing to gain market share and add new customers, including concrete foreman. These increases were partially offset by unit sales decreases to existing customers due to weak economic conditions. Moving down the income statement, our third-quarter gross margin decreased to 10.7% from 12.1% last year, and our gross profit dollars decreased by 20.3%. The decline in profitability from last year was primarily due to ongoing pricing pressure -- particularly on sales to the site-built market -- higher fuel and other transportation costs, and the combined effect of lower volumes and fixed manufacturing costs.

Selling, general and administrative expenses decreased by over $700,000 for the quarter, comprised of $1.6 million of SG&A of newly acquired operations, a $4.6 million reduction in SG&A for operations we previously closed, and an increase in the SG&A of existing locations totaling $2.3 million. The increase in existing locations was primarily due to an increase in bad debt expense of $2.2 million and an increase in accrued bonus of $2.1 million. Approximately $1 million of the increase in bad debt expense was due to an adjustment we recorded in the third quarter of 2007 as a result of a favorable ruling we received on a [preference] claim. The increase in bonus expense is due to an adjustment we recorded in the third quarter of 2007 to reduce year-to-date -- our year-to-date bonus accrual when we felt several of our profit centers would not achieve our minimum ROI hurdle to be eligible for bonus. These increases were offset somewhat by a decrease in wages and related costs due to a reduction in headcount and a decline in sales commissions.

We incurred $6.2 million of asset impairments and other costs associated with idle facilities this quarter. The plants we closed had annual sales of approximately $45 million and annual incremental operating losses of over $6 million. Our effective tax rate is almost 44% for the year to date, which resulted in tax expense for the quarter despite reporting a booked loss. This is primarily due to the impact of nondeductible permanent tax differences and the fact that the Federal Research and Development tax credit was not granted legislative approval until October of 2008. We currently estimate that the annual amount of this credit will total $1.2 million, and will be recorded in the fourth quarter. Moving on to our cash flow statement, our cash flow from operations was $33 million for the first nine month of 2008. Our net earnings of $5.1 million included $44 million in noncash expenses, which were offset by a $16 million increase in working capital since year end. The primary reason for the increase in working capital was an increase in accounts receivable due to the cancellation of our sale of receivables program at the end of September.

If we were to present our operating cash flows excluding the effect of the sales -- sale receivables program for the first nine months of 2008 and 2007, those cash flows would have been approximately $60 million and $57 million, respectively. We continue to curtail capital expenditures, which decreased to $14 million for the year so far. We currently anticipate total CapEx of approximately $20 million for the year. And during the first three quarters, we completed the sale of idle real estate and equipment totaling over $30 million. The book value of other real estate we have classified as Held for Sale on our balance sheet totals approximately $12 million at the end of September. We've repaid almost $39 million of our -- of debt for the year so far, plus the $27 million effect of canceling our parts program -- our sale of receivables program. And we continue to anticipate significant cash flow for the balance of the year, and when combined with the capacity we have on our revolving credit facility, expect to pay off the notes that are maturing in December of 2008 totaling $78.5 million.

A couple of points I'd like to make about the balance sheet. Our total interest-bearing debt at the end of the third quarter decreased to $167 million from $206 million last December and $249 million at the end of last September. Excluding the impacts of our sale of receivables program on our debt, we would have had $249 million last September and $233 million last December, which demonstrates the amount of cash flow we've generated over the last several months and used to pay down debt. And included in the long-term debt, there was $17.7 million outstanding in our five-year credit facility, which has a remaining availability of $252 million after considering the amount outstanding and amounts reserved for letters of credit. Today, the amount outstanding on our revolver is approximately $6 million. That completes my comments on the financial statements. Bill?

Thank you very much, Mike. And now, I'll turn it over to Mike Glenn for a business review and outlook. Mike?

Thanks, Bill. Before I talk about the quarter, I want to say how excited I am about the announcement we made this morning. Since becoming CEO, I've been weighing our opportunities for President of the Company, and Pat Webster has been the clear choice. Pat has been with Universal for 24 years. He's done it all here, and he's done it well. From sales to purchasing to operations, he's had a great career of success. He's a strong leader and a consensus builder, a good communicator, and he has the respect of everyone in the industry and the Company, and I'm pleased that he'll be our new Chief Operating Officer. And when I called Dick Frazier the best lumberman in the Company, I'm not saying what I believe, I'm saying what everyone thinks. There is no one who commands more respect than Dick. Dick is one of the most successful leaders in our Company's history, and he knows how to make money, and he does it wherever he goes. So I'm excited about both of these guys who will be taking important, new positions at Universal, and they'll be critical players for our future.

Our business isn't quite as exciting. Call it what you want -- a devastated global economy, a financial market in ruins, a credit mess. I wasn't even alive in 1928, but I can imagine what it was like, and these are unprecedented times. And they're creating unprecedented challenges for American business, including us at Universal. You saw our numbers. They're nothing to be happy about, and they're nothing like the numbers we're used to. They don't get our people the bonuses they worked so hard for, and they don't move the needle on the growth monitor. But they do give us reasons to be proud of what we've been able to do in these challenging times. As I've noted to our employees here, our operations that are devoted solely to the site-built business have cost us over $30 million in losses this year as of September. If you remove our site-built, our performance has been respectable, especially in times like these, and that's because we're doing the right things.

Like Bill said, we're focused on our balance sheet, on growing market share and taking care of those who rely on us -- our people and our customers. And we're doing what we need to do to make Universal a strong Company for them, for our shareholders, and for all our stakeholders. I believe that's why we've started seeing improvements in our margins in the last three to four weeks, because we're working on cutting costs, on pricing our products right, on receivables and inventory. In fact, in some instances, our field operations have been so intent on maintaining low inventories that they got too late. So we are working with them to get a little bit better balance, to make sure that they keep their inventories in line with their needs; but they're flexible enough to take advantage of any good purchasing opportunities that come their way. We're starting to see more and more competitors cut back their operations or close, and that's going to give us opportunities for additional business.

Here's a look at our markets: In DIY, we're focused on margins. We're adding new products with existing customers, and we are gaining market share. Some of that will happen as players exit the market. Some will happen because we have a rare ability to deliver mixed truckloads to fill multiple needs. And some of that share is coming because we offer the best products and services in the marketplace. You know, I wish you could have been in Houston and Galveston the morning after the hurricane struck. The night before, a dozen or so of Universal employees from places as far away as Atlanta and Missouri traveled to Houston to be on the ground so they could help as soon as the storm passed. And that's what we did. They went to our customers' locations to help them open their doors because their employees were too busy taking care of their own families and property.

So Universal employees loaded generators. We mopped floors, and we did whatever we could to help them out. And they did it on their own. I didn't have to ask them; their managers didn't have to tell them they needed them to fly into a storm zone. They did it because that's what we do. We keep our customers at heart. And by the way, when our people arrived in Houston, the storm had knocked out the power to most areas, and their hotel was damaged and closed, so they slept on floors at the homes of Universal employees. Not one night or two, but night after night. And those homes didn't have power either. That tells you a little about Universal's customer service, and also about the camaraderie you'll find at Universal. It's a special thing, and it's one of the reasons we're surviving in these challenging times with great spirit and determination.

As we noted in our press release, our sales to the big box customers were flat to up in the market. Our overall decline in this market was mostly because of a drop in business with our independent retail customers whose business is mostly tied to housing. In industrial, we're doing less with existing customers because they're manufacturing less. People are putting off the purchase of new lawn mowers or new mattresses, which means we're building fewer bed frames and lawn mower crates. So our strategy is to add more customers. More accounts, less sales per account, as Doug Honholt, our Vice President of Industrial Sales, likes to say. We continued to add new customers in our core industrial business and in concrete forming, which we got into earlier this year. Concrete forming is what industrial was in 2000 -- a wide-open area with lots of promise; and we're seeing solid, early promise from national companies looking for a supplier that can meet their needs throughout the country. We're supplying construction companies that are working on everything -- botanical gardens to highway bridges.

We added 110 new concrete forming accounts this year, and we now have 22 account managers going after concrete forming business out of 20 Universal plants. It's one way we're building our business in a down economy. We're also looking to expand our industrial operations in the markets where we currently have no presence -- markets like Seattle and the Plains states. In site-built, there just isn't a lot to say. We stay focused on making sure that we're right sized to the markets and their opportunities. Sometimes that means closing plants that are losing money. Sometimes you keep an unprofitable plant open because you're willing to take a small loss in order to stay in a market or to keep a particular customer.

Our strategy is different location by location and region, but we're continue -- we continue to evaluate and weigh our operations against our short term and long-term opportunities. We're looking for new opportunities in multifamily and light commercial and in government projects, and we're taking business only that has acceptable margin. If the competition wants to cut prices below cost, that's their game. It isn't ours, and we're walking away from it, because nothing good can come from it. In manufacturing housing, we're hanging on to our dominant market share, and we're serving our customers as best we can so they can have a fighting chance to survive these tough times. Some of our customers are operating at half capacity. Some are becoming credit concerns and we're taking measures to minimize their risk.

But the bottom line is, this industry on the endangered species list. While all of these things may be important, maybe the most important things I hope you take away from this release and this call are: Number one, as I said earlier, our business today can be described as "more customers, less sales per customer". In some markets, we're adding new customers; but customers still aren't doing the volume they were doing before the economy crashed. So we have to add more of them -- more customers, less sales per customers. Number two, we have a solid balance sheet and a strong cash flow. If we see opportunities -- if there's a good acquisition potential or chance to greenfield an operation in an important market -- we have the means to do it. And number three, and most important, Universal's people are the best and the most productive workers I can imagine. We've had to cut and do more with fewer people and resources, and there's been no complaining, no sulking. There's been a realization that we have to work shoulder to shoulder to succeed and make sure that we're a strong survivor in each of our markets.

These are unbelievably challenging times, and we're just -- we're just getting into the tough winter months. But I believe we're doing all the right things to remain solid and to be well-positioned when a stronger economy returns.

Thank you, Mike. You know, Mike and his team are doing a very good job leading and managing this Company through the toughest times imaginable. They're making the tough decision that are critical in the current climate for the future of Universal, and we're very proud -- even the meager results that we have, we're very proud of them considering where everybody else is in this business. So now I'll open up the conference call for questions.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Steve Chercover from D.A. Davidson. Please proceed.

Thanks, good morning.

Good morning, Steve.

Good morning, Steve.

My first question -- did the impairments that you took in the quarter include much in the way of severance? And if so, how much will you save on a run rate going forward?

Good question. Of the $6.2 million charge, $5.6 million was asset impairment. $600,000 was severance. In terms of savings going forward, I'd say about $1 million to $1.5 million a month.

$1 million to $1.5 million per month?

Correct.

Okay. And can you discuss trends in October as compared to September or the third quarter?

It's pretty early to say, Steve. Just two weeks into it.

Steve, I think it's -- the one thing we can tell you is that we are holding from a sales standpoint, but the encouraging thing is that about six weeks ago we really, really put a push on margins. And we are seeing in the last three weeks that our margins have moved up to a level that is starting to become acceptable.

Okay. And you said you're establishing your first-ever facility in Seattle. Is that -- did I understand that correctly?

Well, we said was we're -- there are some markets where we know we we need to go. One we believe is Seattle, and another one is in the Plain states. We haven't broke ground. We're starting to -- we're starting to do some research.

Okay. And final question -- I mean, you've indicated that you have the balance sheet, and we always know that you have the desire to grow. Is it best at this stage to go greenfield or -- certainly, I can't imagine being -- aggressively picking off competitors, but maybe just having the presence there and picking at the carcasses or, you know, having customers come to you when their pre-existing suppliers go away. How do you think of it?

Steve, there will be a time to do exactly what you said -- to pick at the carcasses -- but we're not there yet. This is -- there's going to be some opportunities over the -- over the next year or two to make substantial moves with people that are in serious financial trouble. We've seen -- well, you've seen some of the big ones, too -- you follow them all. I mean, they're a mess. And they haven't watched their balance sheets, and they're not operating with positive cash flow. And they're going to be very easy to acquire. But the time isn't right now. It's -- it's too uncertain.

Okay. Thanks. I'll get back in the queue.

Thanks, Steve.

Thanks, Steve.

Your next question comes from the line of Jay McCanless from FTN Midwest. Please proceed.

Hey, good morning, everyone.

Good morning.

I wanted to talk a little bit more about the balance sheet, specifically on the credit facility. Wanted to make sure the covenants we still need to watch for are 60% leveraged, 2.5 times interest coverage, and also just wanted to find out on the net worth test -- I believe it's $265 million, and is that a tangible net worth test?

It's a GAAP net worth test.

Okay. Okay. But the other covenant --

And that is correct. (Inaudible), you have all those covenants, correct?

Yes. The third covenant, though, is the -- those are all the bank covenants. The noteholders have an additional covenant which is a fixed charge coverage, which is EBIT R -- the R is rent -- divided by interest and rent. And that's set at 1.75 times.

Okay. And as of --

Now, one thing I think I should probably add to that, Steve, is -- is trying to -- it's difficult for -- it would be difficult for you to calculate that from the consolidated financial statements, because some of our subsidiaries are referred to as unrestricted subsidiaries under the documents and are excluded from those calculations. But some of the unrestricted subsidiaries are loss subsidiaries and won't be in the -- aren't in the covenant calculations.

Okay. At the third quarter, how did you stand relative to these covenants?

We were in compliance with all of our covenants.

Okay. The next question I have is on the goodwill. I believe the goodwill balance is somewhere around $150 million. Do you expect further asset impairments going forward? How much of that balance do you believe you might have to write down?

Well, we haven't -- we haven't impaired any goodwill or -- to date. The impairments we've taken have generally been on real estate -- and mostly actually equipment, for safe-built equipment that we -- for idle facilities. You know, we'll be evaluating -- we haven't had a triggering event to require an analysis of goodwill yet. So we'll go through our fourth-quarter detailed calculation and future cash flow analysis, and we'll do that analysis at that time and see how that shakes out in the fourth quarter.

Okay. And then my last question --

As a reminder though, Steve -- or Jay, is that that is a future cash flow analysis, too. So you know, you -- you're going through, you know, a period of tough earning. You know, when you do that calculation, you're looking out into the future.

Okay. Okay. My last question, with the -- I don't know if you can call it a price war -- but with Depot and Lowe's both lowering prices on certain starter items, which I think overlap very well with what Universal Forest Product sells to them, what has been the status of price negotiations with them lately? Are they pushing harder for lower prices? Can you just give us a sense of how things are going at DIY?

Jay, most of our pricing that we do -- that we do with those companies is a fixed pricing based on the market. So they may drop their prices on a retail level, but our prices to them have been set for a period of time.

Okay.

They have not come back to us and asked us to drop our prices.

Okay. And when do those negotiations restart? I'm assuming it's an annual or --

Yes. There's different times for each different category we're in. But we are just starting the negotiations on our pressure treated and fencing, and probably half our business we're starting negotiations now. In fact, after this call I'm leaving for Atlanta.

Okay. And I did have one other I wanted to ask. The notes that are due in December, I believe you said you're going to pay those with a combination of the cash flow on hand and then also the revolver.

Right.

Can you state again how much is left on the revolver or how much is open on the revolver right now?

The revolver currently has a balance of about $6 million. And we have about $30 million, I think, in amounts reserved for letters of credit. So it's a $300 million revolver.

So about $250 --

It's $250 million, $260 million.

Okay. Great. Thanks.

Thank you.

Your next question comes from the line of Keith Johnson from Morgan Keegan. Please proceed, sir.

Good morning, Keith.

Hi, Keith.

Hey, just a couple of questions. I guess kind of starting off with just trends in the quarter, as you kind of came through your third quarter, did they get markedly more difficult or were they fairly stable, or what did you guys see?

I think the biggest thing we've we faced in the quarter was the margin erosion and the declining sales. The -- the one thing that was really disappointing was the site-built continued to drop, even at a rate faster than we anticipated -- and a market that we thought couldn't go any further, which is manufactured housing -- had double-digit decreases again. And those are -- those are the ones that really were impactful in the market.

Okay. On the site-built side, was that more in the single family, or -- erosion there, or was it multifamily, light commercial beginning to slow?

Yes. Most of it was single family. We -- we had some multifamily that -- the projects were committed that they ran into you-know-what -- they had a problem getting financing.

Okay. And how about on the light commercial side, in that channel?

We didn't have a -- we didn't have a major problem in the quarter with light commercial.

Okay. When you made the comment a little bit earlier that you're beginning to see improvement over the last several weeks in your margin, with the -- I guess increased focus there, all I -- all we can see, of course, is the average margin -- I guess gross margin for the quarter, which is around 10.7%. So I was just trying to gauge kind of where -- how much of a margin improvement. Are we seeing numbers back above that 10.7%, or did it get a lot worse than that, and now it's started coming back up?

We're seeing the margins north of 10.7%.

Okay. It's -- and I understand there's a lot of uncertainty, particularly with the financial situation, et cetera, in the market. But, you know, last year in the fourth quarter, it was very challenging market conditions. If you were to kind of look at this year's fourth quarter, how would you kind of characterize the change in market conditions year over year?

Well, we made some major moves last quarter. And we feel that this fourth quarter that we're going to -- we think we'll beat last year's fourth quarter.

And I understand there's a lot of uncertainty around that.

Right.

I guess just one quick final question. You did make the comment about how much of an impact the closed businesses I guess have had, you know, on the bottom line. Is there a way -- I mean, could you give me an idea of where those businesses were at maybe the high point, how well they were performing versus where they are now? I know that you -- you said those --

You talking about the operations we closed this year that --

Yes.

-- we said they had incremental operating losses of about $6 million -- where were they at their peak?

Yes. How much of an impact have you had -- you know, just kind of where the businesses would have been operating to where they are today?

Yes, that's a tough one to answer.

I don't have that in front of me, Keith, sorry.

Okay. Okay. Thanks. I'll jump back in the queue.

Thank you.

Thank you, Keith.

At this time, there are no further questions in the queue. I would now like to turn the call back to Mr. Bill Currie for closing remarks.

Okay. Thank you all once again for taking time to listen to our story in these very uncertain times. You know we're -- you know we're on it. And every single important key indicator in our business is being analyzed daily by our management team, and we promise you that we'll be working very diligently. We'll outperform our peers, and we will end up being, as we always have been, a good, solid, investment for you. So thank you for your time, and we got to get back to work.

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