UFP Industries Inc (UFPI) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Universal Forest Products, Incorporated earnings conference call. I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this presentation. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Lynn Afendoulis, Director of Corporate Communications. Please proceed.

Good morning, and welcome to Universal Forest Products' second quarter 2009 conference call. On the call today are Executive Chairman, William G. Currie, CEO 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 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 Company's reports on From 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 so much for taking the time out of your day to listen to our conference call for the second quarter. Many of you may be surprised by the results of this quarter, but I'm not. And I won't be the next quarter or the next quarter or the next year, because I've watched this leadership team guide us through the toughest times in the Company's history and not just guide us through, but brilliantly guide us through with great skill and I knew if anyone could pull it off, it would be the guys at Universal. Mike Glenn and his team made some tough decisions that embarked on some new initiatives that they said would yield results in the long term.

Frankly, I wasn't always convinced but they've proven to be the power of their decisions and their moves. They consolidated the right plants. Their CI initiative is remarkable and is making our operations better and more efficient than they've ever been. They paid attention to all the basics, like our balance sheet, like receivables and inventory management, and they've created success and profitability in the process. I am as proud as I can be of a team who has delivered flawlessly on strategies designed to bring us through these kinds of recessions. We're not out of the woods, but I have every confidence we will continue to outperform everyone, and we will be stronger in the months and years to come.

I'll now turn it over to Mike Cole for a review of our performance. Mike?

Thanks, Bill. I'll get things started by reviewing our income statement for the quarter.

Our total net sales for the quarter decreased by 27%. We estimate this was comprised of a 19% decrease in unit sales and an 8% decline in overall selling prices due to the lumber market. As a frame of reference, commodity lumber prices during the period were approximately 22% lower than prices in 2008.

Reviewing by market, our sales to the DIY market decreased 14% compared to last year, primarily due to an 8% decline in prices as a result of the lumber market. Our unit sales were off 6% this quarter, due to a decline in housing starts and consumer spending, offset somewhat by market share gains we achieved with big box customers.

Our sales to the manufactured housing market decreased 47% for the quarter, primarily due to a decrease in unit sales and soft lumber prices. HUD code shipments were off a reported 46% in April and May and modular production was also similarly off.

Our sales to the construction market decreased 54% this quarter also due to a decrease in unit sales and soft lumber prices. Housing starts were off approximately 49% in April and May.

Finally, our sales to the industrial market decreased by 24% for the quarter, due to a 15% decline in unit sales and a 9% decline in selling prices due to the lumber market.

Our unit sales have continued to be negatively impacted by decreased demand due to economic conditions. We believe we've gained market share due in part to acquisitions, adding new customers, expanding our product offering, and increasing our penetration into the concrete forming market.

Moving down the income statement, we're pleased to report our second quarter gross margin increased to 16% from 12% last year. And our gross profit dollars decreased by only 3% in spite of a 19% decline in unit sales. Our improved profitability was primarily due to improved material costs as a result of better buying and inventory management to protect margins, improved labor and overhead cost from plant consolidations and right-sizing efforts, lower fuel costs, and lastly, the lower level of the lumber market.

Selling, general and administrative expenses decreased by $5.7 million or 9% for the quarter, which was comprised of a $4.1 million reduction in SG&A for operations we previously closed, and a decrease in the SG&A of existing locations totaling $1.6 million. This was primarily achieved through a decrease in compensation related expenses tied to a decline in headcount, offset by an increase in accrued bonus and bad debt expense. SG&A increased as a percent of sales due to a combination of the low lumber market and an increase in bonus and bad debt.

We recognized a net gain of $700,000 related to the sale of certain assets and other impairment and exit costs this quarter. This net amount was comprised of a $1.1 million gain on the sale of certain real estate, a $300,000 charge to impair the value of certain machinery and equipment, and $100,000 of severance charges. Our net interest costs decreased by about $1.8 million due to a significant reduction in debt, and termination of our sale of receivables program, and a decline in short-term rates. Additionally, the current quarter interest expense included approximately $360,000 related to a make whole payment on the yearly termination of $15 million of senior notes due December 2009. As a result of the retirement of this debt, we expect our interest costs will be about $420,000 lower in the back half of this year.

Moving on to our cash flow statement, our cash flow from operations was $62.7 million this year, compared to $25.6 million last year. Also, I think it's important to note that our operating cash flow number in 2008 included $23 million of positive cash flow related to our sale of receivables program that we terminated in September of 2008. Our operating cash flow in 2009 includes net earnings of about $15 million, $20 million of non-cash expenses, and about $27 million related to a decrease in working capital. Working capital decreased primarily due to reductions in inventory as we reached our primary selling season, the impact of a lower lumber market on our inventory levels, and an increase in accounts payable as purchases and volumes increased during the selling season. These reductions are offset by an increase in accounts receivable, due to higher sales volume at this time of the year versus December.

Capital expenditures totaled $7.3 million in the first six months of 2009 as a result of efforts to curtail our spend. We currently plan to spend approximately $13 million for the year.

We sold certain real estate for approximately $10 million so far this year, and recognized related gains in the income statement. Remaining real estate that's classified as held for sale has a net book value of $3.1 million.

Finally, our cash outflows from financing activities was $47 million, as we retired the senior notes I mentioned earlier and paid off the remaining balance of our revolving credit facility, which was a little over $30 million at the beginning of the year.

Couple of points I would like to make about the balance sheet. First, at the end of June, 2008, we had sold an outstanding approximately $50 million of receivables under our sale of receivables program. Excluding the impact of this program, our receivables last year would have totaled almost $278 million or 123% of June sales. Compared to $198 million or 122% of June sales in 2009, so our receivables cycle was very consistent from 2008 to 2009. Second, our total interest bearing debt in amounts outstanding under our sale of receivables program decreased to $55.5 million at the end of June, 2009, from $228 million at the end of June 2008 due to our strong cash flow.

That completes my comments on the financials, Bill.

Thank you very much, Mike and now we'll turn it over to Mike Glenn to give you a business overview. Mike?

Thanks, Bill. The other day in a presentation to our employees, I said I didn't want to talk about last year or the year before or how difficult the past few years have been. I'm tired of that conversation - we all know it and we've all heard it too many times. Quite frankly, I don't want to dwell on the past because that's not who we are. We're focused on the future and that's what I wanted to discuss.

Because the future is very bright for Universal. We've been managing forward, making the tough decisions, and focused on what we can control for a long time. And now it's paying off. We're well positioned in our industries and markets and we have every reason for optimism.

Don't get me wrong. We're not complacent. As I said to our employees, it's like a baseball player who batted .125 last year and is up to .235 this year. It's better but it's not good. We're doing better than we did in the most difficult year in our history, but we're far from doing great, so that's where we're focused, on being a strong, great and growing Company once again.

Mike Cole gave you an overview of our financials and a rundown of our performance in our markets. I'd like to put our performance and future opportunity in context. And for that, the past is important. Consider this. We've gone from a peak of annual housing starts in 2005 of nearly 2.1 million, this year we're expecting something like 530,000 starts, a 75% drop.

At the peak, HUD code shipments were 373,000. This year, we're expecting shipments of somewhere around 50,000. Over an 80% decline. As recent as 2004, the composite lumber price, which affects our selling prices, was $473 a thousand. In May, it was $198 a thousand. A drop of 58%. In February of 2007, the Consumer Confidence Index, which is a key driver in home repair and improvement expenditures, was over 111. In February of 2009, it fell to 25. This lowest level since the measure was first taken in 1967. That's a drop of 77%.

All around us, our market has been reduced to virtual ashes. This hurts everyone but we fared better than most of our competition. Some of our biggest competitors have had devastating results and have had to file for bankruptcy. The economy has hurt us too, but we've been able to create success, finding new roads for growth and opportunity, and report earnings instead of losses, and opportunities instead of challenge.

How do we do this? Because of a few basic, simple things. One, we have a diversified, balanced business model that gives us many avenues for success, and doesn't tie our performance to any one market or industry. Two, we've always been a lean organization with employees who are empowered to make suggestions and whose voices and ideas are heard. And we have managers and leaders who are trusted to make decisions. So we don't have to go through layers of bureaucracy and procedures to get things done. That doesn't mean we don't have systems and procedures. They just reflect the leanness of our organization and the experience and wisdom of our people, and the trust and autonomy that's critical to organizations like ours that consider itself entrepreneurial. This allows us to be agile, to respond to issues and conditions quickly. And allows us to be innovative, which is the third reason for our success. Innovation allows us not only to be creative in our existing markets and business, it also ensures that we can reinvent ourselves when and where necessary.

That's why our industrial markets, which started out as crates and boxes, grew to be much more. It became specialty packaging, wood and wood alternative components for other products and most recently, it took on concrete forming which is a very promising area. We're also looking at some other significant avenues in industrial that could provide significant growth opportunities in new and exciting directions, and I hope to be able to talk about them in future calls.

Innovation is why DIY market didn't simply remain treated wood for us, which is how we got in the business in 1978. It became hundreds of lumber products comprising thousands of SKUs at our retail customers and now a growing number of consumer products, like wood composite decking, wood and plastic trellises and lattice and many other products. In fact, I just had a presentation by our new product development group. Some of the things that they're planning to introduce in the 2010 and 2011 are really cool and innovative products, and they go way beyond wood and wood alternative products for decks and Specialty Products for lawn and garden and marine uses.

Universal has many opportunities for growth and success in many areas. We have a culture that encourages innovation and accommodates change and we think ahead. We manage for the future. Sure, we're one step ahead of the competition, and our customers' challenges and needs.

We're well positioned for the future. We have a diversified business model, so we're not dependent on any one industry. We have a solid balance sheet. Our organizational structure and philosophy and our innovation allows us to be agile and to anticipate and respond to changes in the marketplace. We are focused on the future, and on growing our Company, and we make a habit of doing what we say we're going to do. We're very, very optimistic about the future, we're hard at work to make sure that we continue to please our shareholders and our stakeholders.

Thank you very much, Mike. Now we'll be more than happy to open it up for questions, and we'll try to give you honest, candid answers.

Thank you. (Operator Instructions). Your first question comes from the line of Steve Chercover, representing DA Davidson. Please proceed.

Good morning, Steve.

Hey, Steve.

Good morning.

Do we surprise you, Steve?

Yes, you sure did. I always -- I try and avoid all the congratulations but that was a great quarter. Congratulations. I do have a few questions, though. First of all, were there any extraordinary items? Reversals of provisions or anything else? Mike mentioned a few really small things.

No, just the things that are on that line item of the income statement. The net amount of $700,000, those are all kind of unusual. But everything else was pretty well routine and consistent from period to period.

Well, then, could you expand -- I think you mentioned $10 million worth of real estate sales. Was that in the second quarter?

No, that's -- I was talking about the number on the income statement, the proceeds number so that was a year-to-date comment. We had sold some property in Oregon and we sold some property in Texas and then a couple of other small sales.

Where do they show -- was that in the current quarter?

The gain associated with Oregon was in the first quarter. The gain associated in the proceeds, also, for Texas were recorded in the second quarter.

Okay. But that's not responsible for these margins in any way?

Not at all. Those gains are on that line item of the income statement that I referred to earlier.

The $716 million?

Correct. Because there's a year-to-date amount too, and that year-to-date amount includes the quarter.

I think it was 716,000.

For the quarter.

Pardon me. Okay.

The margin is a different discussion and that's a result of the breakdown that I gave you earlier.

So that's where I want to go.

Fair enough.

To make sure I understand, as lumber prices increase, clearly your sales go up, margin probably recede a small bit. Is that correct?

Correct. Yes. The overall level of the market as you know, lumber is kind of a pass-through for us so we try to start that way. In a low lumber market, try to get a certain profit per unit to be the same, you have a higher margin. In a higher lumber market, the reverse happens.

So I guess at the risk of asking you to make a forward statement, do you think that these margins are sustainable or close, at a level close to what you just put out?

Steve, there's four components that affected our margin in the quarter. One was transportation. We certainly got a -- we got a break over a year ago and we think that transportation probably accounted for about 1% of our margin increase. The other one was all the right-sizing that we've done over the last 12 months. So that certainly will stay there. The big part of it is our CI initiative where we've been able to increase our productivity through our plants with less people and to be honest with you, that's a big, big part of this margin move that we've had and the other part is the lumber market. It's at 1974 levels and although it's in some areas it's problematic for us, in other areas it creates a lot of opportunities and by that, what I mean is, if someone would call us and say they have some number two lumber for $150 a thousand, our guys no longer ask what width or what length. They know at that number they can buy it and cut it up and do something with it and turn it into $350 wood. So it became -- our guys in the field did a terrific job of managing that lumber market to their advantage.

And is it safe to say that you're putting a lot of that similar inventory on the ground?

When the opportunity to buy is there, we do it. The market moved up a a little bit in the last month. We don't think it's sustainable, so the answer to your question, we didn't buy a lot of wood sitting on the ground right now. We think there may be another opportunity late in the quarter, early in the fourth.

Great. One last question, I'll turn it over. What would you characterize your operating rates right now? I mean, you probably still have a lot of room to ramp up activity, and presumably kick butt.

Yes. You're getting at capacity utilization, Steve?

Pardon me?

You're getting at capacity utilization?

Yes.

That's a difficult question for us to answer, having as many different plants as we have, but one of the things we've kind of kicked around is if you look at our current sales levels and the current capacity we're at today, we think we can get to the sales goal in our 2012 plan is $3 billion without a heck of a lot of expansionary CapEx. That gives you a big picture look at what our capacity utilization is.

To ramp it up would you go first to providing overtime to the crews and maybe a second shift.

We can certainly do those things too to expand capacity.

Thanks. Great quarter.

Next question comes from the line of Trey Grooms, representing Stephens, Incorporated. Please proceed.

Good morning, gentlemen and congratulations again on an outstanding quarter.

Thanks, Trey.

Good morning.

Couple of questions. You kind of broke out how much of an impact transportation had on your margin increase. Could you try to give us a little bit more color on what the other three drivers of the improved margin, what kind of impact they had?

Sure. Labor and overhead were about a 1.5 points better than last year and the balance was in material cost as a percent of sales. 1.5 points I mean as a percent of sales. So labor and overhead are about 1.5% of sales lower than previous year, year-over-year, and the balance of the improvement was material costs.

Okay. And I guess this kind of goes, a follow-up on the last questions. Is there any reason these are margins that we haven't seen you guys put up in I don't know how far back you have to go to see it, but is there any reason why when things get better, demand improves, why we wouldn't -- couldn't expect for you guys to put up a similar type margin under a much better demand kind of scenario?

Yes. The answer to that is yes. There's a couple of things in there that I want to talk about. One is we talked about transportation and the pickup that we had. We also think that there's a lot more money in our transportation and we've got a -- I hate to use the word a task force, but a group that's together. We think we've got about another million dollars, minimum, that we can pull out of our transportation cost over the next year. We're also focusing in on some of what we call office optimization and we're looking to take some costs out of our offices and getting a little bit leaner in there.

We feel we can pull a fair amount of cost out but at the same time, as we go from $2 billion to $3 billion, we're going to be able to handle that with the same amount of people. The only thing that will be different, Trey, is we have certain fixed standards with Home Depot and so $80 bucks on $200 wood is one margin, $80 bucks on $400 wood is a different margin. And that's something that we can't control. That's the only thing that would have a little bit That's the only thing that would have a little bit of a negative impact.

I'm sorry.

That's not so much a negative impact. It just makes you look at the margins. It results in a different margin number.

Right.

We're still getting the same profit per unit. So --

Okay. And on the profit per unit, is the majority of your sales to Home Depot or structured like that or is it -- ?

No.

Okay.

It's strictly our treated dimension and it's not the majority of our DIY sales. Okay. And did mix between the different I guess end markets, did the change in the mix there have any benefit or take-away for margin at all in the quarter?

Yes the site built market is extremely competitive. We have not chased the bad business. We let everybody else do that and so that market segment is down by choosing.

Okay. And could you guys give us just kind of a guess, I mean, you guys have done a great job of paying off debt throughout this entire downturn. Can you give us kind of a sense of where you think it might shake out for the year?

Where debt will shake out for the year? I don't want to provide a forecast because we're not doing that anymore, but we expect to continue to generate cash flow through the balance of the year.

And what you would expect to continue to pay debt down with that cash flow generation?

Well, that debt -- we don't really have any left.

Don't have any debt.

That you could pay off. We have -- we're left with industrial development bonds which are -- earn interest or accrue interest at less than a point. We have a senior note that's out there that -- it's not due until 2012. It's a very attractive fixed rate and has repayment penalties so we don't want to do that. We'll be accumulating cash. We'll be looking at investment opportunities. We'll be looking at share repurchases and probably in 2010 we'll look at expansionary CapEx too.

Thanks for clearing that up. I guess my last question is just to clarify. You had mentioned that -- and I don't know if I heard it wrong or not, but interest expense could be 400 -- I think you said $400,000 lower in the back half. Is that per quarter or for the entire second half of the year?

That's for the second half of the year. You would want to divide that evenly between the third and the fourth quarters and that's because that $15 million note isn't outstanding any more and we used available cash.

Sure. Okay. Thanks, guys.

Thanks, Trey.

Your next question comes from the line of Jay McCanless, representing FTN Equity. Please proceed.

Good morning, everyone. Wanted to talk a little more about the mix and the fact that you're not chasing the bad business in site built. Is that potentially the way you guys are doing to look in two or three years, site built continues to go down, you're doing more DIY and industrial sales?

Jay, I think that's partly true. I think the other thing we're going to do is we're going to chase different business in the site built side of it. I mean, there's -- the production builders certainly put a lot of pressure on your margins, but there's commercial projects and there's a lot of government projects going on right now that we're in the midst of doing that gives us a little bit better margin than we have today.

Okay. Because I was looking back at during the boom periods and I think the highest gross margin you achieved in that 2002 to 2007 period was roughly 16.7%. Do you think, based on the mix of business that you're going to be doing going forward, that that is a level you could exceed with all the right-sizing you've done, et cetera?

I don't want to keep coming back to it too much but with the level of the lumber market, is fairly sizable impact. One thing you'll want to go back and adjust for the level of the lumber market in prices and then look at the margin. Go back, because I -- that period may have been a period where lumber price -- demand was high and lumber prices were high. So go back and adjust those to current lumber price levels and then look at the margin. So that will have an impact.

Okay. Assuming that things are on the up swing on a national basis from here, how much more right-sizing do you think you have left to do? Are you 90% there? 95% there? Et cetera.

Jay, we always think -- we always look at our plants, in good times and bad and those that don't perform, we'll close. And we have an analysis that we do that if plants are costing the Company cash, if they're in a negative cash position, then we put them on notice and if we don't see improvement, then we'll close them. So to answer your question, Yes, we'll -- be honest with you, we'll probably look at a couple more plants.

But that list of plants is a pretty short list.

Yes. It's in the 90%, if that's your question.

Okay. In other words, the list of problem plants is much smaller now than it was, say, a year ago or something like that?

Absolutely. Much.

You don't even have to hold up one hand and you could count them.

Okay. And then just wanted to get some commentary from you guys on manufactured housing, what you're seeing out there, what your thoughts are about that industry right now.

Tough.

Oh, boy. Who would have thunk, 50,000, huh?

Pretty shocking number.

But long-term we do believe in that industry. We do believe it's affordable housing for America. We've still got to get through some of these foreclosures. We've still got to get some financing for the industry. But we believe in the industry. We don't know if it will ever get back to 375,000 floors, but we certainly think it could get back up to 175 to 200,000 floors.

Okay. Great. Thanks, gentlemen.

You bet.

Thanks, Jay.

Your next question comes from the line of David Leibowitz, representing Horizon Asset Management. Please proceed.

Good morning, David.

Hi, David.

Good morning, David.

A few brief questions. First, you indicated in your prepared remarks that you might increase your CapEx next year, 2010. Where would those monies be going and roughly how much, can we quantify that number?

It's too early for us to try to quantify that yet. We'll go through our budgeting process in late Q3. But there's been a lot of interest in equipment at existing plants, dedicated to industrial business. So that will certainly be something we take a hard look at.

Okay. Usually on these calls you talk to any potential acquisitions you see out there, without identifying them, but the industries they're in, and given how hard this period has been on the competition, not to mention yourselves, do you see yourself becoming a bit more aggressive in that area?

David, to be honest with you, we had spoken with one Company early in the quarter that we thought we could make a deal with and it didn't come about. We are talking to a few other companies right now. But we do see opportunities out there and we are chasing them.

Carefully.

We hope so. In terms of the big box customers, are you taking on more responsibility for additional regions with them?

Yes, yes.

And --

We're taking on more responsibility for different regions and we're also taking on more business with some of the other players that are out there.

And at the moment, what percentage of your total business is with Home Depot?

Let me see here, David. Depot is about 35% of our sales for the year-to-date, which is up over last year.

We did gain share with the big boxes.

Thank God it's up.

And what about Lowe's? Has that been growing as quickly for you as Home Depot?

Yes . We are growing with different types of products with Lowe's than we do with the Home Depot and we've also been growing with making nice in roads with

Great. The other question, your new product development has been quite active in the last you few years. What percentage of your total revenue are products that you introduced within the last 24 months?

That's actually not a metric we track, David. We track the value-added products as a percent of total sales but we don't track new products but our Consumer Products Group has been very active in new products and our core plants have too and it's an important part of our initiative for through 2012.

David, the introduction of new products, especially the consumer type products, it's not the volume that's important in that particular formula, it's the margin enhancement and the customer satisfaction that's important because it maintains all your other product lines and that's why that innovation and new products and -- it helps you in a lot of areas. It's not just purely a volume kind of a thought process.

Last question, if I may. The long-term debt as a percentage of total capital is amongst the lowest, not just for you, but within the industry. Are you concerned that being underleveraged might make you the recipient of a hostile offer?

We don't think there's -- we don't really -- we can't know that. We just run our business, David and our business right now is cash is king and it's still going to be cash is king and we don't have any debt and we don't want any. The banks are not that easy to work with right now. And we're happy that we don't have to negotiate with them.

Amen. Let me say thank you very much and keep up the great work. The numbers you put up today were very much an eye-opener for all of us.

Thank you, David.

Thank you, David.

With no further questions in queue, I would now like to turn the call back to Mr. Bill Currie for closing remarks.

Again, thanks very much for the questions and for your interest in our Company. As I always say, we're going back to work and we're working for you and I hope we can give you some more pleasant surprises. Thank you very much.

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