UFP Industries Inc (UFPI) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Universal Forest Products, Incorporated, fourth quarter 2008 earnings conference call. My name is Michelle, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

And I would now like to turn the presentation over to your host for today's call, Ms. Lynn Afendoulis, Director of Communications. Please proceed.

Good morning, and welcome to Universal Forest Products fourth quarter 2008 earnings conference call. On the call today are Executive Chairman, William G. Currie; CEO and President, Michael B. Glenn; 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 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. The Company does not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date 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 uncertainties. 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 thanks for joining us today. 2008's earnings might stack -- might not stack up well against previous years, but there's a lot of good news behind those numbers. The management team at Universal Forest Products executed with razor sharpness and did all the right things in a very, very tough year. They sized their business to their opportunities, and they did so with class. They concentrated on their balance sheet, generating $116 million in cash, and paid down debt and receivables financing. On top of that, Mike Glenn and his team made a profit under the most difficult circumstances the manufacture in our business has ever experienced. We don't like to grow our success on the backs of others' failures. It's a lot more rewarding to win when your competitor is still standing. But the truth is, many, many of our competitors have fallen, and many more will do so. It's an opportunity for a strong Company like Universal.

We have gained market share in all four segments, and will continue to do that. And because we have also kept all of our key people, we are the best-positioned Company in the business and ready for the turnaround in the economy. The first quarter of 2009 will be very difficult; but following that, I think you'll see Universal back on the road to solid profitability and sustainable growth. I'm proud of this Company, and have great confidence in what though future holds. I have been here for 38 years and never lost money. Odds are real good that we'll continue that trend into 2009. Now I'll turn the call over to Mike Cole to review the financials. Mike?

Thanks, Bill. I'll get things 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 17%. We estimate this was comprised of a 14% decrease in unit sales and a 3% decline in overall selling prices due to the lumber market. Reviewing by market, our sales to the DIY market decreased 8% compared to last year, primarily due to a 5% decline in unit sales as a result of the housing market and a decline in consumer spending. Our sales to the manufactured housing market decreased 34% for the quarter, primarily due to a decrease in unit sales. HUD code shipments were off a reported 35% in November, and we believe modular production was off by a similar amount. Our sales to the site built construction market decreased 29% this quarter, primarily due to a decrease in unit sales and a decline in selling prices due to the lumber market and continued pricing pressure. Single family housing starts were off a reported 45% for the period, and multi-family starts were off about 42%.

Finally, our sales to the industrial market decreased by 10% for the quarter. Although we added over 1,000 new customers since this time last year, our sales to existing customers declined due to economic conditions. Moving down the income statement, our fourth quarter gross margin increased 11.9% from 10.1% last year, and our gross profit dollars decreased by only 2.7% in spite of a 14% decline in unit sales. Our improved margin was primarily due to a decrease in our labor cost as a percentage of sales due to plant consolidations and closures and efforts to right size our operations based on demand. Selling, general, and administrative experiences decreased by over $5.4 million for the quarter, comprised of $1.6 million of SG&A of newly acquired operations, a $3.1 million reduction in SG&A for operations we had previously closed, and a decrease in the SG&A of existing locations totaling approximately $3.9 million. The decrease in existing locations was primarily due to a decrease in compensation-related expenses tied to a decline in headcount, offset by an increase in bad debt expense. We recorded a tax credit of almost $3 million in the quarter, which substantially offset our pre-tax loss of $3.5 million. Two unusual things happened in the quarter.

First, the Federal Research and Development tax credit received legislative approval in October, 2008, so the entire amount of this year's credit was recorded in the fourth quarter. Second, we identified and recorded several state income tax credits in the fourth quarter. Moving on to our cash flow statement, our cash flow from operations was $88.6 million for 2008. Our net earnings of $4.3 million included $48.4 million in non-cash expenses and a $35.9 million decrease in working capital. I think it's important to note that the cancellation of our sales receivables program in September reduced our operating cash flow by approximately $27 million in 2008. Had this we reported as a financing activity, our operating cash flows would have been almost $116 million, and our cash output from financing activities would have been almost $135 million. We came in slightly under our capital expenditure target of $20 million to finish at $18.9 million for the year. There were no business acquisitions or significant sales of property, plants or equipment completed during the quarter. And we repaid $105 million of debt for the year, plus the $27 million effect of canceling our sale of receivables program.

Couple of points I would like to make about the balance sheet. First our total interest (inaudible), debt and (inaudible) outstanding under our sale of receivables agreement decreased to $101 million at the end of December '08, compared with $233 million at the end of December 2007; and included in long-term debt, there was approximately $30 million outstanding on our five-year credit facility, which has a remaining availability of $240 million. That completes my comments on the financial statements. Bill?

Thanks a lot, Mike. And now I'll turn it over to Mike Glenn, our CEO, for a business review and an outlook. Mikey?

Thanks, Bill. 2008 is going to go down as the toughest year in our Company's history. What started out as a housing problem that was fueled by the sub-prime issue turned in o a catastrophe for nearly all of the industries globally. But even with all of the turmoil in the economy and the markets, we ended the year modest profit. And importantly, we used our cash that we generated to cut our debt by more than half, so our leverage ratio of 16% is the best in our history. I can't emphasize this enough -- this Company stands on a solid financial platform. I can't tell you how proud that makes me. Proud of our people, and their ability to continue to push forward even when faced unprecedented challenges, and proud of the people who had the vision to create a business model that can get us through even the roughest time in our history.

We're creating success not just for ourselves and our futures, but the honor of many of the employees we lost to right sizing our operations. We made tough decisions for the greater good of our Company, and we owe the people in the communities impacted by those decisions our best efforts to be successful so we can participate in our communities and the resurgence of our national economy once again. We have many reasons for hope as we look to the future: A cost structure that is aligned with our business; a continuous improvement program that's reaping rewards and bringing us efficiency day by day; and employees engaged in their work, and making Universal a better Company. We realize 2009 is going to be a hard year, but we're ready, and we're hopeful, and we're focused on targets and strategies that will lead us to a new and sustainable growth in years to come.

Let's take a look at our markets. Let's start with site built, because it had a much bigger impact on our other markets in 2008, and because there's just not a whole lot to say. In 2008, single-family housing starts dropped by more than 40% compared to '07. And tight credit conditions began to have a negative impact on multi-family and light commercial construction activity as well. Housing will continue to be a challenging market as long as credit issues remain and foreclosures continue to impact inventories and selling prices. So we're focused on what we can control. We're making sure that we're right sized. We have consolidated some operations, and we continually evaluate our markets and opportunities.

We continue to look for healthy new opportunities to maintain good relationship with builders that have strong balance sheets and outlooks, and to take business only if it has acceptable margins and if the customers have the ability to pay. We continue to look at the opportunities in this market with an eye towards sustainable growth that makes sense for the long-term success of Universal. In DIY, the lowest consumer confidence levels ever have drastically reduced consumer spending on most things, including home repair and remodel projects. People have less disposable income, are less certain about their income and future, and lost value in their homes; so they don't feel like spending on those homes in 2008. We believe that scenario will last to 2009. So also in this market, we're focused on what we can control. We're adding new products, we're gaining market share, and we're improving our efficiencies and our profitability.

Manufactured housing remains a weak market. It's future depends in large part on the oversupply of conventionally built, low-cost homes and the availability of conventional financing. We're hanging on to our dominant share and helping our customers maintain their business and success. As with other markets, we continue to take measures to minimize credit risks; but the future of manufactured housing continues to have big question marks, and we're making sure to stay on top of issues, customers, and opportunities. Industrial provides us with the most excitement, and we're looking for new growth and new opportunities in this market.

We'll be focusing on growing our role as the only nationwide packaging specialist, and we're charging full speed ahead into the concrete forming arena, because it continues to open doors. We sold nearly 200 new accounts in 2008, and have 27 account managers involved in concrete forming sales across the country, and we're growing. We're selling both direct and two-step and have seen success with both strategies, and we're continually adding new products and capabilities. Concrete forming is a fragmented market that's perfect for Universal. It allows us to leverage our experience, strengths, and national footprints in ways that no other company can.

So overall, we expect 2009 to be a tough year, but I can tell you we're prepared for the rough road ahead. We're positioning ourselves for growth while our competitors are positioning themselves for survival. We're ready to take on 2009, and more than ready for better days and years that are sure to follow.

Thank you, Mike. I think we'll open it up for questions, and we'll try to give you candid, honest answers.

(Operator Instructions). We will pause momentarily to compile a list. Our first question comes from the line of Steve Chercover of D.A. Davidson. Please proceed.

Good morning, everyone.

Good morning, Steve.

Three quick questions, I think. First of all, your sales allowances fell substantially, either on a dollar value or percent value; and, you know, isn't that -- does that reflect exposure to bad accounts, or can you explain why that happened?

No, the sales allowance is an area that we use to -- it does have sales allowances in rebates and discounts, but it also has adjustments in it to take our cycled operations that use construction contract accounting and adjust sales to the proper number based on completed contract.

Okay so it's not --

So I wouldn't make into that that the adjustment that's in there relates to discounts or rebates. I think it relates more to the construction contract accounting.

Okay. Thank you for that, Mike. Also wondering, should we anticipate any more writedowns going forward?

You talking about impairments of assets?

Yes. Or do you think you have right sized the business to the point where you have -- you have cut to the bone. You want to have facilities in the geographies where you are, and you'll just, you know, hunker down?

Steve, we're -- we continue to evaluate our operations, and we continue to right size based on market conditions. So I don't know if I can tell you that there won't be any more. Can I just tell you that we continue to look six to nine months out, and try to right size our business based on what we see.

Okay. And when you made the comment that there are big questions about manufactured housing going forward, I mean, are you suggesting that that's just a category that could go away or that you would abandon? You are the biggest.

Well, we certainly wouldn't abandon it. We're concerned that the lack of financing for that industry, you know, we've -- we had 81,000 shipments last year, and we think that we're going to be somewhere around 74,000 next year. It's just an industry that continues to shrink, and it's an industry that hasn't opened up yet this year.

Okay. That was it. Thank you.

Thank you.

Thank you.

Your next question comes from the line of Jay McCanless of FDN Equity. Please proceed.

Good morning, everyone.

Good morning, Jay.

First, wanted to ask on the credit facility and also on your bond indentures, how is your compliance looking there?

We are in compliance on each one of them -- on our bank agreements and our note-holder agreements.

Okay, great. And then what was the total bad debt expense for '08?

The total bad debt expense for 2008 was about $5.6 million, which is substantially higher than it was last year.

Okay. What should we think about for '09, and how is that going to impact our SG&A do you think?

Boy, it's hard to say. This has been one of the toughest years we have had in a while in bad debt expense. Expect a very tough environment going into next year too, and it's probably our biggest risk area. We'll continue to manage it very cautiously and carefully, but it is a risk, and we do -- we know we're going to get some losses next year.

Okay. Okay.

If you want to be conservative about it, probably something similar next year.

Okay. Great. And then wanted to dig down on industrial for a second, and especially in concrete forming. If commercial construction does drop off later this year, but we get some benefit from the stimulus bill in terms of highway construction, et cetera, et cetera, is that a growth area for the concrete forming business, or it is mainly focused on commercial construction.

That's definitely a -- Jay, definitely an area of growth for us. We go not only from highway construction to bridges to parking ramps -- I mean, anything involved with concrete is an opportunity for us.

Okay. Have you all seen or heard any inclination or any indications that people are accelerating spending in anticipation of larger projects coming?

I have not.

Okay. Last question. Facility count now versus facility count this time last year?

Oh, Jay, it's a little bit difficult to answer that, but I -- the short answer is we probably -- we have probably right sized or consolidated our moth balled somewhere around six operations last year; but let me tell you what is a little misleading of it, is in Oregon we had a big facility, and right across the street we had another plant. While we wound up taking the plant across the street and just moving it in to the one -- the original plant, and sold that facility. So we view that as a closure, but in reality business had just consolidated so much, we were able to do all of the business out of one plant. So don't read too much into the fact that there was six plants that we moth balled.

Okay. Or I guess a different way to ask it is, what percentage capacity reduction maybe have you seen from last year to this year? Is that a better way to ask it?

Tougher one to answer with having 80 facilities.

Okay. Great.

(Inaudible), you know, we have only sold a handful of facilities. The facilities are still there. We have been able to consolidate a lot of the sales into existing facilities, and those facilities are there and we are going to be able to use that capacity later when the markets rebound.

Okay. Great. Thank you.

Yes.

Thanks, Jay.

Your next question comes from the line of Robert Kelly of Sidoti. Please proceed.

Good morning, guys. Thanks for taking my question.

Good morning, Bob.

Hi, Bob.

Just a question on the gross profit dollars essentially flat year on year despite the sales decline. What with the -- you know, the big important drivers of that preserved margin that you posted for 4Q? Maybe just order of magnitude if you can't quantify?

Yes, the biggest thing is the thing I mentioned in the opening comments, is the labor cost as a percent of sales. That's really driving the improvement, and it comes from all of that consolidation activity that we have done in the right sizing efforts.

So labor is down as a percent?

Labor dollars over last year, correct.

What percent --

And if you think how much we have done over the course of the last year, it's been a lot, so --

Right. Have you seen any sort of stabilization on the pressures on pricing from site build or any of the other markets?

Mark, I guess sequentially if I go from Q3 to Q4 it's off a little bit, but not like it has been previously.

Okay. And then as far as -- maybe look into 1Q here. Did the trends, you know, accelerate downward November versus October, December into November? I mean, should we expect another big falloff sequential in 1Q '09 as we hit the winter months?

Sales decline, you mean?

Yes, top line.

Well, Bob, the first two weeks of January were very difficult. And the first week for us was New Year's week, so -- most facilities weren't working -- and the week after was a little bit tough. But in the last three, four weeks since then, we have kind of seen a normalization of orders; and although they are down from a year ago, they are not down nearly as much as they were in the early part of January.

So I guess what I'm trying to get at, you know, the margin that you are putting up at the gross line for 4Q, is that sustainable into '09?

Yes.

Seems kind of counterintuitive relative to what you've done thus far --

Yes, because the sequential improvements that you feel improved a lot, too, sequentially, and labor did too; so to the extent we continue to stay ahead of that on labor, and feel certainly a lot better, yes, those would be sustainable.

Great. And then just finally, on that sales allowance. Now is that credit a line item on the income statement?

Yes, that's -- that's -- well, it would be a debit in accounting speak, but yes, it reduces the sales. It reduces the sales.

Right, but it doesn't hit any of the cost items?

Correct.

All right. Thanks.

You bet.

Your next question comes from the line of Trey Grooms of Stephens, Incorporated. Please proceed.

Good morning.

Good morning, Trey.

Just a couple of quick questions. Can you guys -- you had mentioned first quarter '09 expect to be very difficult; after that it sounded like, you know, you were a little bit more optimistic. Can you just kind of give us some idea of what your thinking is, you know, going into the second quarter and what is improving there? Is it something macro or more just operational?

Trey, a couple of things. What we're seeing right now is -- is a lot of our retail customers are not taking their early spring buys that they would normally take in December -- I mean, in January and February. They are holding off their inventory buys. I mean, so their inventories right now are very, very low, and typically they will take an early buy at a discount to get ready for spring. They haven't done that yet, and it's impacted our sales this month, and we anticipate it impacting us in February. But those sales will come in Q2 for sure. So that's the biggest part in our DIY sales. And in manufactured housing, they really haven't opened up yet, and we think in a couple of more weeks they'll get back -- and probably by March 1st, they'll get back into a normalized, at least, conditions.

Okay. That's helpful. And if you look out to '09 just -- your thoughts on CapEx, and, you know, any use of -- or if you could give us some idea of cash flow, expectations, and then any -- your thoughts on use of cash in '09?

Yes, as far as CapEx goes, we're probably looking at up to $10 million. Depreciation, amortization, going to be in the neighborhood of 45 to $48 million. We don't want to -- I don't want to give any any more information than that because we're not providing -- you know, we're not providing guidance in terms of earnings and things, so I'll give you those.

Okay. But assuming that you -- I mean, you guys put up some good free cash flow this year. Assuming that you generate free cash flow again in '09, what would your primary use of that cash be? You know, are you going to continue to be in kind of debt paydown mode, or are you going to be more in cash, I guess, hoarding mode? What are your thoughts there?

Yes, we have got a -- at the end of the year we had $30 million outstanding on the revolver, and we had a $15 million bullet maturity due on a senior note, and those -- the $15 million is due in December. So first option would be to pay those down, and save dry powder for when we need it.

Okay. Thanks, guys.

Yes.

Hey, Trey, I wanted to touch back on your first question that I didn't touch on, and that was as we go in to the second quarter we also picked up a significant amount of business with our -- with the retail customers that will start taking effect also in the second and third quarter, so we made good gains with all of our customers in that area.

When you said you picked up business, is that -- that's with existing customers, right? I mean, it's not -- so you are gaining share with existing customers is what you are saying?

Correct. We're gaining share, and we're getting new product lines into our customers also. It's not just what we had. We also went in and picked up some other business.

Got you, very good. Thank you.

Uh-huh.

Your next question comes from the line of [Burt Whitson] of Kiosk Capital Management. Please proceed. Sir, if your line is muted, please unmute.

Hello?

Hey, Burt.

Good morning.

Good morning, Burt.

Hi, thanks. Just one question on the receivables -- do you expect any more cash strain there, and can you comment on any loss assumptions based on the high level of receivables?

As far as the receivables program goes, the program is canceled, so there would be no further cash flow effect one way or another on a sale of receivables program. It was completely canceled and basically paid off at the end of September of '08. As far as receivables reserves -- bad debt allowance, I think you are basically asking -- we go through and we look at our write-off history, which included a tough year for '08, and we established a reserve at the end of the year based on that history. So we think we have got a very reasonable reserve set based on the end of the year, and then I will start accruing, based on that write-off history, new dollars for next year. Again, like I said earlier, it's our biggest risk area, and one we're going to have to pay very careful attention to. But right now we have feel like we have got very fair reserves set up.

Great. Thank you.

You bet.

Your next question comes from the line of David [Leibowitz] of Horizon. Please proceed.

Good morning.

Good morning, David.

Good morning, David.

A few quick questions, totally unrelated. First, have you seen any change in your top 5 or 10 accounts as well as the percentages of you total revenue they represent?

Cycles down, you know, overall. They don't represent as big of part of the top 5 list as they are previously, but the big (inaudible) issue of (inaudible) been at the top still remain there.

Okay. But Home Depot is no longer 25%, give or take, of your total revenue?

No, they are right there. Absolutely they are right there.

Okay. Second, you will be cash flow positive for the year, if I understood your answer to a prior question.

Correct. We would expect to be able to pay off a lot of that revolver and pay off that senior note.

And will that cash flow exceed your EPS?

Will the cash flow exceed our -- whatever our earnings per share is? Yes.

That is correct.

Yes, absolutely. We have such a big add-back for depreciation and amortization, and we'll manage our working capital well. Yes, that's the case.

Also, I know it's not for you the Board to make the determination, but you do have a record of raising the dividend every year. Is there any reason to believe you might not liberalize the dividend?

There's no reason to believe there will be any changes, David, in the way that we run the business from -- since you have been part of it.

Well, that's more years than either of us would like to admit to, but very comforting answer. Next, in terms of acquisitions -- and you indicated that the competition is trying to survive while you are trying to prepare your next growth momentum. Is there any reason to believe that acquisitions might not happen this year?

There's no reason to believe they won't happen.

We're looking at a couple, David, but they are going to have to be priced right, and they're going to have to not give us any cash drain, and we're going to have to see a future in it. It's easy to buy companies now, but then you have got to fund them, and we're being very cautious.

Are you more interested at this point in buying product or buying marketing territories?

We're mostly interested in expanding our industrial business in to markets in areas that now aren't major for us. That's where you will see acquisitions if you see them -- it will be in that industrial products area.

And what revenue level are you looking at? Where do you have your comfort zone?

10 to $15 million.

With the management that is going to stay on, or where you would move management from a nearby territory into their facility, as it were?

We always try to keep -- you know, if it's successful company and has good management, we always try to keep the management. That's really what you are buying.

Okay. And the last question is, are you getting more -- well, two more questions, if I may. First, are you getting any bids for -- from your big boxes to enter additional territories where in the past you might have been loathe to enter those territories?

Yes, we had picked up market share with all of our big box customers in to areas where we previously hadn't been.

Great. And lastly, the recent run up in lumber prices after hitting the multi-year low, is this helping you, hurting you, or are you as confused as everybody elsewhere lumber is going next?

David, those -- that market run-up was a direct result of the shutdowns by the mills in Western Canada and the southern United States. And to be honest with you, that had to happen. They were out producing what was being consumed. So we kind of anticipated a bump up in the market, and we kind of think that this year is going to be a little bit of a roller coaster in the market. The supply chain right now has very little inventory in it; and when the weather breaks, I think you'll see another spike in the market. So we're not confused, we just -- if we could anticipate when it was going up, we would certainly buy a little bit sooner, but it will be a roller coaster year on the market.

Thank you very much.

Thank you.

That concludes the question-and-answer session. I'll now turn it back to Mr. Bill Currie for closing remarks.

Okay. Thank you all once again for spending so much time for us. We know it's a confusing market for you folks as well as it is for us, but we'll just -- we'll wish you the best in what you were doing, and we're going to go back to work and see if we can't make another positive year. Thank you very much.

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