UFP Industries Inc (UFPI) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the third quarter 2009 Universal Forest Products, Incorporated earnings conference call. My name is Katina and 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' third quarter 2009 conference call. On the call today are Chief Executive Officer, Michael Glenn and Chief Financial Officer, 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 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 Mike Glenn.

Thanks, Lynn, and good morning everyone and thanks for joining us today. There's nothing really sexy about our results and our work in the third quarter. We focused on blocking and tackling and the strategies that we've laid out over the past few years and it's working. We've reduced our overhead cost by making sure we're sized right for our business opportunities. We continue to focus on the basics like managing our working capital, eliminating waste and becoming more efficient. We continue to look at opportunities for growth and our finance team has done a terrific job in maintaining a strong balance sheet and cash flow. We're cautious about the coming quarters, which are typically our most difficult, and about 2010, which will be as least as challenging as 2009. But make no mistake about it, we're optimistic about our future. We're a strong, lean Company, that has the capacity to drive and accept the challenges and opportunities and to grow. We see a bright future for our Company after the tough months and quarters ahead. Before I talk about our business and future I'll ask Mike Cole to take us through the financials. Mike?

Thanks, Mike. I'll get things started by reviewing our income statement for the quarter. Our total net sales for the quarter decreased by 25%. We estimate this was comprised of an 18% decrease in unit sales and a 7% decline in overall selling prices due to the lumber market. As a frame of reference, commodity lumber prices during the period were approximately 13% lower than prices in 2008. Reviewing by market our sales to the DIY market decreased 15% compared to last year, primarily due to a 9% decline in unit sales this quarter. Unit sales were off due to declines 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 37%, primarily due to an estimated 32% decrease in unit sales this quarter. Unit sales were off entirely due to declines in HUD code and modular production.

Our sales to the site-built construction market decreased 43%, primarily due to an estimated 37% decrease in unit sales. Unit sales were impacted by housing starts, which were off approximately 36% from June through August, and decisions to stop selling lumber packs in some regions when margins are so low, the business doesn't make sense. Geographically it's noteworthy that we experienced a significant decline in unit sales in the Northeast due to the drop in the multi-family market, which had been relatively good through the third quarter of 2008. Finally, our sales to the industrial market decreased by 20% for the quarter, primarily due to a 12% decline in unit sales. Unit sales continue to be negatively impacted by decreased demand due to economic conditions, but we believe we have gained market share, due in part to 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 third quarter gross margin increased to 15.1% from 10.6% last year and our gross profit dollars increased $4.6 million to 7% in spite of an 18% decline in unit sales. Our improved profitability was primarily due to the lower level of the lumber market, lower material costs as a result of better buying and inventory management to protect and improve margins, improved labor and overhead costs from plant consolidations and right-sizing efforts, and lower fuel costs. Selling, general and administrative expenses decreased by $6.8 million or 12% 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 $2.7 million. The decrease from existing locations was primarily due to lower compensation related expenses tied to a decline in headcount and smaller decreases in several controllable expense categories.

These decreases were offset somewhat by an increase in accrued bonus expense. If you set aside the increase in accrued bonus expense, our SG&A costs were about 18% lower than last year, which was similar to our decrease in unit sales. We felt like we did a good job of scaling down our expenses in line with unit volume. SG&A increased as a percent of sales due to a combination of the lower lumber market and an increase in bonus expense. Our net interest costs decreased by about $1.7 million due to our reduction in debt and termination of our sale of receivables program and a decline in short-term rates. Moving on to our cash flow statement. Our cash flow from operations was $112 million this year compared to $33 million last year. Also I think it's important to note that our operating cash flow number in 2008 included $27 million of negative cash flow related to the sale of receivables program that we terminated in September of '08.

Our operating cash flow in 2009 includes net earnings of $25 million, $31 million in noncash expenses, and a $56 million decrease in working capital. Working capital declined primarily due to reductions in inventory as we close out our primary selling season, the impact of the lower lumber market on our inventory levels, a slight increase in accounts payable due to higher purchases and volume this time of the year versus December, and an increase in accrued bonus and income taxes due to higher profitability. These reductions were offset by an increase in accounts receivable due to higher sales volumes at this time of the year versus December. Capital expenditures totaled $9.5 million in the first nine months as a result of efforts to curtail our spend. We currently plan to spend $15 million for the year. We sold certain real estate for approximately $10 million during the first six months of the year and recognized the related gains in the income statement.

We didn't have any property sales in the third quarter. The remaining real estate that's classified as held for sale has a net book value of $3 million. Finally, our cash outflows from financing activities was $47 million as we terminated $15 million in senior notes in the second quarter and paid off the remaining balance of our revolving credit facility, which was a little over $30 million at the beginning of the year. Consequently our interest bearing debt has decreased to $56 million and our cash balances have grown to $80 million at the end of September. That completes my comments. Mike?

Thanks, Mike. Mike and his team demonstrate the strength of our focus these days on managing forward and focusing on the things that we can control. One thing we can't control is the lumber market. I've been in the business for over three decades and the lumber market is at the lowest level I've seen. Production at the mills is off 40% from the highs of 2007. And the composite lumber price at the start of the quarter, which was already low at $245 a thousand, finished even lower at $234 a thousand. And that affected our selling prices. We're concerned about the curtailed production at the mills because we believe that when there's a spike in demand, we don't believe the mills will be ready for it. But fortunately our purchasing power and our leverage from our vendor mills should continue to serve us well. But we can't do anything about lumber prices.

We can't do anything about consumer confidence, which remain low, or about the abundance of housing still in the market. But we can do things that affect our costs and our efficiencies and our opportunities for sales. And we're working harder and harder every day to impact the things that we can to earn a dollar on every sale. And we're in the process of becoming a stronger and leaner Company. With our focus on continuous improvement, our plants are as efficient as they've ever been and I know that we'll be even more efficient tomorrow. We're finding new opportunities for growth in our markets with new customers, new products, and by serving existing customers with more. And we're thinking outside the box. We have a business model that makes room for innovation and a culture that encourages it. So when you look at -- at interesting opportunities every day, like the new radiant barrier that we've added to our product mix.

It can be used by builders and can be sold by retailers as an aftermarket product. It's an Energy Star product and is a brand-new product for Universal and one that we're very excited about. Another interesting new venture is our laminating capacity that's adding new -- that's adding new products for manufactured housing and it's allowing us to offer more products to existing customers. And then there's the patented wet curing blanket Universal has an exclusive agreement on to sell it to the concrete construction companies. It's different from other blankets used in the concrete business and it's bringing new sales and a new attention to Universal. In our industrial market we used to sell basic crates and boxes, but not anymore. Today we provide concrete forms for the tallest building in Austin, Texas and for the world's largest gas turbine manufacturing plant.

And that's because we have the best and most driven sales force in the business, in addition to design and production crews that jump through hoops to meet the consumer's unique needs. Single family housing isn't going anywhere for a while, so we're focusing on other site build opportunities, like some government projects and small commercial construction. These are areas that we've had small exposure to in the past. We're selling more to our retail customers and focusing on initiatives that allow us to help the big box customers make sure they have the right products in the right markets at the right times. It increases our service and our value to these customers and helps us become a better Company and vendor. And we're adding new products to help retailers meet customer demand for products to use in outdoor living and garden spaces. We're supplying everything from plastic lattice to composite decking to jade steppingstones.

As we grow our product lines, we're growing our Company. We recently announced the reopening of our plant in White Pigeon, Michigan as an assembly plant for a new vinyl fencing product that we're importing from Canada. It's great to do what we're in business for, to grow, to open plants, to provide opportunity for people in communities across the country, and to grow our value to our customers and shareholders. We continue to find opportunities for growth despite the depressed economy. In fact, we're growing share in each of our market segments. But we're not taking on business that's not profitable or doesn't spell opportunity. We're focused on profitable, sustainable growth and we're making decisions based on that focus. Once the economy turns around, we'll be ready for more vigorous business and expansion.

We have a solid foundation, we're focused on the basic -- the business basics that will help us make sure we're doing our best and we're committed to sustained growth through a prudent, far-sighted decision making. We're the hardest working people in the industry and we're ready to take on more, much, much more. We are realistic about 2010, but it is going to be as tough as 2009. But we are also optimistic in demonstrating day to day that we will succeed. That does it for me and we will be happy to take any questions that you may have at this time.

Thank you. (Operator Instructions) Your first question comes from the line of Trey Grooms representing Stephens. Please proceed.

Good morning, this is Will Greene on the line for Trey.

Good morning, Will.

Hi, Will.

I wanted to get a, try and get a sense for where headcount stood right now and kind of what kind of, I guess, unit sales level that would support and kind of as volumes start to recover, how long will it take before you need to really begin rehiring?

Well, headcount is now below 5,000, to answer the first part of your question.

Okay. And so I mean, as you look out to recovery, I mean, what kind of sales level would that support? I mean, if you saw a 5% increase in demand next year or 10%, I mean, what kind of level would you really need to start hiring again?

Well, Trey, I -- well, I think -- I think we could easily handle a 5% or 10% increase in sales without having to add much headcount. We believe that this continuous improvement initiative is really helped us increase our productivity and will allow for expansion without having to hire a lot of new -- a lot of new heads at this time.

Okay. And then I don't know if you can walk me through kind of where plant utilization stands, I guess, on an overall basis. I know it's going to vary from segment to segment, but can you kind of walk me through about where that is and kind of where it compares to a year ago?

Yes, I can try that one maybe at a real global level. I think if you look at the beginning of the downturn, our sales were $2.6 billion or so. We added acquisitions that probably brought our capacity up to $3 billion. And now if you look at our current run rate for sales, we're in the neighborhood of $1.7 billion. So we feel like we have the capacity with the plants we have today to get back to $3 billion in sales. And we're currently running at run rate of almost $1.7 billion.

Okay. And then in terms of, I guess if you could talk about I guess what's the area of focus for uses of cash at this point? I mean, do you guys have an M&A pipeline at all, kind of what are your thoughts there?

Sure. We're looking at our dividend policy. We're -- we'll be active in share repurchases. We do have plans to -- for increasing our expansionary -- we had curtailed capital expenditures pretty -- pretty severely during the downturn, but we're looking at increasing that and putting some several million into expansionary CapEx for next year and we certainly have many M&A objectives as part of our 2012 strategy. Looking at all those things.

Okay. I guess just one more that I had. When you think about a normalized housing market from here, I know it's kind of tough given what we've seen over the past decade, but what do you think that looks like and when do you think we get back to kind of a, that normalized level?

Yes and I'm assuming when you say normalized, you're thinking somewhere in the number of 1700, 1800 units and we're looking at next year to be somewhere in the 600. Slow, sustainable growth. We don't -- we don't see much happening in the housing for probably 24 to 36 months.

Okay. Great. That's all I had, guys. Thanks.

Thanks, Will.

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

Good morning, Mike.

Good morning, Robert.

Great. Just a question, you had made the point that ex the bonus accruals SG&A was down 18% year on year. In the past you had talked about being -- it being difficult to get below kind of a $50 million quarterly run rate in 1Q and 4Q. Has that changed at all? Can you get below, significantly below $50 million in the low demand quarters?

Yes, I think the bonus accrual does -- does have an effect in those quarters, but I think it is a little more realistic now to think we can get down below there.

Okay, great. And then as far as you talked about having capacity of $3 billion, a lot of good as far as your right-sizing actions and whatnot. Say you were to get back to $3 billion and don't -- not putting a timetable on it, how much of the changes you've made over the past 12 to 18 months have structurally improved the margins compared to where you've been historically, operating margin's been around 3% to 4.5%. Have you raised that to 5%, 6%? How do you think about that if you get back to $3 billion?

Well, I guess I would just point to the goals that we have as part of our 2012 strategy. We wanted to get to a 300 basis point improvement in our operating margin by that time and we feel like we can achieve that through cost reductions and through the efficiencies we gained through continuous improvement.

And the starting point for that goal?

Was 2008. We were a little under a point, 1%, in operating margin at that time so we wanted to take it up to four. And we were going to achieve it through cost reductions and efficiencies.

Okay. In past quarters you've kind of given us the bridge to the gross margin improvement, productivity, cost cuts and raw materials. Could you give that for -- ?

Yes, you want a little more color on the increase from last year?

Please.

Yes, I think first off, I'd say that our -- there's a 450 basis point increase from last year. I think the first part of it is there's about a 50 basis point increase just because of the level of the lumber market being lower. Then there's -- then there's about a 240 basis point increase, material costs being better this year than last year as a percent of sales. Then you add a little -- about 100 basis point increase because of labor and overhead and efficiencies from right-sizing and consolidations. And then lastly, the balance is fuel.

Okay. Thanks, guys. Keep it up.

Yes, thanks.

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

Good morning, guys.

Good morning, Keith.

Good morning.

Quick question on that bridge year-over-year. Did I hear you say correctly 240 basis point increase due to lower material as a percentage of revenue?

Yes, that's correct.

Okay. What's, I guess, kind of driving that and is that something we could kind of look at as given the volatility that the lumber market can show sometimes, how should we look at that going forward on that 240 basis point portion?

It's several things. One thing, Mike and I will chime in on it, is doing it probably a better job with position buys this year to protect margins. So we've been more conscious of that. We probably suffered a little bit on our inventory turnover, but it was well worth it on the margin side.

Okay.

The other part of that is we chatted on last quarter is our ability for cuts in yields and how we look at -- at the market where we can take a two by eight and make it into a two by six.

I remember.

Yes. So that plays a big part and that's certainly, in our view, gives us a very strong competitive advantage over our competitors.

Okay. And then that cuts in yields portion of that, that kind of comes in and out of the lumber markets over periods of time or is that something that, because of your I guess strategic advantage and size in the business that you guys can generally access on a regular basis?

Yes, it's -- it's a moving -- it's a moving cut in yield. It's not always the same. So sometimes we may be -- we may be taking two by tens and making two by sixes. We may be taking two by sixes and making two by threes. May take a long length and take it into a shorter length and using the block for something else. It's a -- it's a moving target and it's something that our folks are very, very good at and very in tune to that very few people understand and can do.

Okay. What about weather during the quarter, at least the month of September, Southeast was very wet. Was that a factor in any of the markets you guys serve that may have affected the volume trends we're seeing?

Yes, sure. When it -- when you get these downpours that you have in the Southeast right now, it certainly affects our business. but it's kind of what we tell our folks, don't call us and give us a weather report, just work your way through it and it's just a part of business.

Okay, understand. Do-It-Yourself, if I look at the volume trends kind of coming through this year, seems like I guess the down 9% in the third quarter was a little bit worse than the down 7% in the second quarter. In that specific market, are there changes you guys are making the way you're going to the market or is it that the consumer is facing continual headwinds and are pulling further away from that market than maybe they have over the last two years. What kind of trends there?

Yes, I think you kind of hit it, Keith. I think that there's some pretty strong headwinds out there and typically -- typically, in the -- in that tail end of the third quarter and that September market, September time, we see a real dropoff in business because people are finishing up vacations, kids are going back to school and they become a little more cautious and we dealt with -- we dealt with some of that and then -- and then typically October picks up a little bit and then we deal with November and December and that's really kind of driven a little bit by weather.

Okay. And then I guess final question in response to a use of cash flow question a little bit earlier you talked about maybe expansionary capital that could be employed in the plan. Is there any color you could give us on maybe CapEx levels for 2010.

Yes, I think it will probably be close to the level of depreciation. So if we're at $32 million or so on depreciation, I would expect maintenance to be in the $20 million to $22 million range and expansionary could be -- could be $10 million or so.

Okay. Thanks a lot.

Thanks, Keith.

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

Hi, good morning, everyone.

Good morning, Jay.

Wanted to follow on with the previous question about the big boxes and some of the lumber yards you sell to. You said that you're taking more share at the big boxes and I wanted to know are the products you're selling them more DIY focused as opposed to do it for me type products and what if any effect is that going to have on profitability and unit growth going forward?

Jay, it's -- it's some of what we talked about in the -- in the opening comments, the radiant barrier, that's something different than we've done in the past. It's a non-lumber commodity product that we think has tremendous potential and certainly it brings a different margin for us than commodity lumber. We're focused more on driving a higher value product to the Do-It-Yourself market than we have in the past.

Okay. Next question, was interested in your comment that you said you've stopped selling lumber packs in certain geographies. Could you talk about which geographies you're not selling those in anymore?

Yes, Texas is one where we -- where we're selling less lumber packs now than we were before.

Any others that stand out or is it mostly just Texas?

No, it's hit and miss in different spots.

Okay. Sticking with the site builders, there seems to be this back and forth about whether or not the first time tax credit's going to get extended or if they're going to expand the tax credit. Have the site builders indicated to you guys that they might ramp up spec production or starts, et cetera, if either the credit gets extended or expanded?

Jay, we haven't -- we haven't felt much of that and we haven't got a lot of comments on it.

Okay. All right. And then my last question, just on the capital allocation, what right now holds you guys back from repurchasing more shares? I mean, is there a specific opportunity that you're looking at or just wanting to get a better sense of how '09's going to end up? What's -- what's the thinking there?

The window closing is part of it. When we get to within a couple weeks of our quarter end, the window closes and we can't be in the market buying our stock, so that's a big part of it. And when it hits our price target, then we'll -- then we'll take some shares out. We have $1.2 million, I believe, that's still authorized.

Okay. Great. Thanks, guys.

Yes.

Thanks, Jay.

Your next question comes from the line of Steve Chercover representing D.A. Davidson. Please proceed.

Hi, Steve.

Good morning, how are you?

We're doing well.

Great. I apologize, I missed the very beginning, but I was just wondering first of all are there any new products in your DIY pipeline that excite you?

Yes, we talked a -- we talked a little bit about this radiant -- radiant barrier that we're really excited about. We think it's a great DIY product. It's outside of what we normally do. We've -- we've got it in some test markets and we'll see how it does. But we're kind of excited about that.

Okay, I'll follow-up.

We have -- we did a -- earlier in the year we did a cut to size plywood kind of a new store set for one of our customers and we're -- we're seeing some pretty good results with that. We think -- we think we'll be able to expand that. And certainly we talked about -- we talked about opening up a plant that we had closed last year in southern Michigan to -- we reopened it as a vinyl assembly plant. We've done a venture with a Company in Canada that's extruding the parts for us. We are now -- we're doing the assembly in the old White Pigeon plant. It's probably -- the plant will open up as a, we think, about a $40 million plant for us, of which somewhere in the neighborhood of $20 million of it is new business for us. It's a -- it's a very -- very exciting product. It's going to change the way the consumer looks at vinyl. That I'll tell you. It's a much better product, a much cleaner product, a much stronger product. It's a -- it's a DIY product that gives you the feel of a pro fence and we think that it's going to really change the marketplace.

Cool. And given your comments with respect to growth, particularly in site built over the next few years, are there any other markets that you might go to for higher growth? I know you had a small foray into the Caribbean. Would you go into Latin America or elsewhere?

No. In terms of site built, are you talking about going into site built or are you talking about industrial and Do-It-Yourself?

Industrial Do-It-Yourself. I mean, I'm just saying if you're looking for growth and we know that the housing recovery is going to be tepid for the next couple years, then it doesn't mean site built, it means we're just going for where the money's at.

Yes, we are in the -- we are in the -- we are shipping, just so you know, we are shipping into the Caribbean and we're going to focus on our industrial and concrete forming. We're making -- we're making really good progress. We're coming out with different products that we did -- compared to what we did two years ago. It's -- continue to watch that, Steve. It's a big move for us.

Great. And final question. I know your comments regarding lumber prices near-term. If you had the belief that things were going to appreciate into 2010, I mean lumber prices are going to go up pretty strongly and given your balance sheet strength, will you be willing to lay a little bit of product on site in order to take advantage of that in Q1?

Absolutely. Absolutely. We -- we're -- we did a little bit of it last year. We'll do a little bit of it this year. We believe that there will be opportunities out there for us to -- to make some opportunistic buys and we'll be in the market doing it.

Well, that was part of the recipe for the beautiful second quarter, is that not correct?

That was a little bit of it, yes.

Good. Well, thank you very much.

Thanks, Steve.

Thanks, Steve.

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

Well, thanks for joining us on the call today. We know your time is -- is really -- really precious and we appreciate you taking the time to spend with us this morning and we're going to go back out and work hard for you and we appreciate your time. Thank you.

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