UFP Industries Inc (UFPI) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Universal Forest Products, Inc. earnings conference call. I will be your facilitator for today's call. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call.

Good morning, and--

Lynn Afendoulis, Director of Corporate Communication. Please proceed.

Thank you. Good morning, and welcome to Universal Forest Products' fourth 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 21E of the Securities Exchange Act of 1934 as amended. Such forward-looking statements are based on the beliefs of the Company's management, as well 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 back circumstances or functions or events that occur after the date of the forward-looking statements are made. Actual results could differ materially from those included in such forward-looking statements.

Investors are cautioned that all forward-looking statements involve risks and uncertainty. Among the factors that could cause actual results to differ materially are the following, adverse lumber market trends; competitive activity; negative economic trends; government regulations; and, weather. These risk factors and additional information are included in the Company's reports on Form 10-K and 10-Q and on file with the Securities and Exchange Commission as well as the property of Universal Forest Product. 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.

We spent a lot of time in the past three years telling you things that we're going to do, from right sizing our organization to closing unprofitable plants, to eliminating waste and focusing on some basic principles like managing our inventories and receivables, and making sure that we had a very strong balance sheet. And I think that our numbers reflect what we've done. Today, we're a more efficient organization than we were three years ago. To be honest with you, we're a more efficient organization today than we were last week, thanks to our CI Journey, which is making us a better company day after day. Our general managers and officers are focused on the basics, allowing us to improve our inventories, our receivables, and things that affect our bottom line. And we believe that we have the most solid balance street in the industry. We told you what we were going to do, and we did it.

Now I'm going to tell you what we're going to focus on this year. We're a sales organization and we are going to focus on top line sales. That will be the name of the game for Universal. We'll grow through new opportunities with existing customers. Obviously, we'll add customers, and we'll bring new products to the market. And we also hope that we'll grow through acquisitions. We're looking and we're trying, but we will not overpay for anything. And we're finding it tough right now to make some deals that make sense to us, but we'll stay true to what we always have been, and that is we will make the right deal for Universal and the right deal for the acquiring company. We're done with watching our business recede. We're focused on sustainable long-term growth. We won't give away any business in any of our markets, and that's one of the reasons we're in the position we're in today for a lean, strong, with a good cash flow, and with a rock solid balance sheet.

I am more than optimistic about our future and opportunities. I'm excited. I'm excited to get out of bed in the morning and to see what we can get done today. We have the best management team and work force in the industry to help us reach our goals. To be honest with you, right now we have 60 of our general managers and officers in one of our buildings here in Grand Rapids, and they have come here today and for the next two days across the country to talk about growing sales and the best way for us to do it. And I need to get over there to meet with them and to hear about their bright ideas so we can start executing them and growing our company. But remember this, we always do what we tell you we're going to do. And I'm telling you we are going to grow our top line sales.

And now I'll turn it over to Mike Cole for a review of our financials and then we'll take some questions.

Thanks, Mike.

I'll get things started by reviewing our income statement for the quarter. Our total net sales for the quarter decreased by 20%, driven by a decline in unit sales. By market, our sales to the DIY market decreased 15%, as unit sales continue to be impacted by declines in housing markets and consumer spending. Our sales for the manufactured housing market decreased 15% entirely due to declines in the industry, HUD code, and modular production. Our sales for the site-built construction market decreased 42% this quarter. Unit sales were impacted by housing starts, which were off approximately 26% from September through November and multi-family starts in particular, which were up about 69% during that same period.

We've also mentioned in the past we've made a strategic decision to walk away from unprofitable, unreasonably priced business, which has hurt sales, but has helped us improve our profitability. Finally, our sales for the industrial market decreased by 9% for the quarter, resulting from decreased demand by our customers due to economic conditions. We believe we have gained market share due in part to adding new customers, expanding our product offerings and increasing our penetration into the concrete forming market.

Moving down the income statement, we're pleased to report our fourth quarter gross margin increased to 13% from 11.8% last year, primarily due to an improvement in material costs resulting from better buying and inventory management to protect and improve margins. This improvement was offset to some extent by the impact of lower sales and fixed manufacturing costs. Selling, general, and administrative expenses decreased by $6.5 million, or 13% for the quarter, which was comprised of $1.7 million reduction in SG&A for operations we previously closed and a decrease in the SG&A of existing locations totaling $4.8 million. The decrease from existing locations was primarily due to lower compensation-related expenses tied to a decline in head count, incentive compensation accruals, and many smaller decreases in several controllable expense categories. Impairment and exit costs this quarter are a result of additional client closure actions we took during the fourth quarter, primarily related to operations supplying the site build market. Considering the external challenges we continue to face affecting our sales, we're pleased to report an increase in pretax profits for the quarter, excluding impairments and exit costs, of almost $2.2 million.

Moving on to our cash flow statement, we're pleased to report cash flow from operations was $128 million this year compared to $89 million last year. For comparison purposes, I think it's important to note that our operating cash flows in 2008 included $27 million of negative cash flow related to the Sale of Receivables program that we terminated in September of that year. Our operating cash flow in 2009 includes net earnings of $24 million, $47 million in noncash expenses, and a $57 million decrease in working capital. Working capital decreased primarily due to reductions in inventory and receivables due to lower sales volumes and demand. Capital expenditures totaled almost $16 million for the year, as a result of efforts to curtail our spend. In fact, we were able to sell our fixed assets for an amount which nearly funded our capital expenditures, which primarily consisted of sales of idle real estate.

Our cash outflows from financing activities was $56 million, as we paid off nearly $50 million of debt, paid dividends, and bought back some of our stock in the fourth quarter. Because of our strong balance sheet and confidence in future cash flows, in October, our Board approved an increase in our semi-annual dividend rate from $0.06 to $0.20 a share. Finally, our interest bearing debt decreased to $54 million and our cash balance has grown to $82 million at the end of December; and our $300 million revolving credit facility remains unutilized except the $32 million reserve for letters of credit. That's all I have on the financials, Mike.

Thanks, Mike. And now we'll open it up to questions.

(Operator Instructions). And your first question comes from the line of Steve Chercover of D.A. Davidson. Please proceed.

Good afternoon, everyone.

Hey, Steve.

Hi, Steve.

First of all, in the last six weeks or so, lumber and panel prices have been on a pretty good roll. I'm wondering, do you view that as a sign recovery, or is it inventory restocking? If I'm not mistaken, higher prices are normally bad for your margins. Maybe you can give us a little comment on that as well, please?

Steve, the, the rise right now is a supply issue, not a demand issue. We've got terrible weather across the country, as everybody's aware of, and we had more rain come across the southeast last week, and they just can't, they just can't get in and get their logs. And a year ago at this time, there was a big buildup of finished goods sitting at the mills, and sitting in warehouses down south. This year, there really isn't any inventory at this time sitting in the warehouses, so this is more supply-driven. Is it bad for our margins? Yes, sure, we have fixed adders, so if you have a fixed adder on $200 wood versus $400 wood, it would negatively -- on your margin, but when that market goes up, you certainly have higher gross profit dollars, also.

And, Steve, through this, these spikes, which is in many ways traditional up until about four or five years ago, we would see these spikes. They usually come about a month or two later. We would see these spikes in the marketplace. And in some ways, it plays into our strengths. We can manage within these peaks, where a lot of companies can't. And what I mean by that is it goes back to, we don't have to buy just a 2 X 6 X 14 and pay whatever price they are demanding. We can go in and buy 2 X 10 X 18s when they are really cheap and cut them back to 12's, which are premium and then we take the six footers and use them on our stair stringers. So these peaks that are in there create great opportunities for us and in many ways, help us increase our margins.

And the other side of that, Steve, is when this thing goes, when this thing comes down, and it always does, our ability to cut up wood and move it through the system is a lot quicker than anybody else. So we don't get hurt as bad as other companies, although on a downside, certainly we do take, we do take a few lumps.

Sure. And then could you give us a little sense of any regional trends that you're seeing beyond what we know is happening with the weather?

Regional trends in terms of just the market in general?

Yes, like any, any, any regions that seem to be recovering faster or slower, in your various markets.

It's been an unusual, from about December 15 until today, weather pattern that has affected our business everywhere. I was in Florida three weeks ago for meetings and there was ice and every tree was covered and the fruit was, the fruit was going to be destroyed. Now, that's a tough deal for Florida, but to be honest with you, maybe California will pick up that business and being a national player, that will help us. The storms in the northeast have slowed business down there for us, so it's affected us everywhere.

Okay. Well, you're certainly sounding confident with the balance sheet like you have. That seems reasonable. At what stage do you think you'll start providing guidance again, or is it still a little bit early for that?

I think it's a little early for that. We're not planning on doing it for 2010 right now.

Well, thank you, both. I'll get back in the queue.

Thanks, Steve.

Your next question comes from the line of David Leewood from Verizon Asset Management. Please proceed.

Good afternoon.

Hi, David.

First, two questions. Am I to take what you said at the very beginning, that we are expecting to have higher sales this year than we did a year ago?

Absolutely.

Okay, and as a follow-up, would profit margins expand or at least operating margins expand as a consequence of that?

We, we don't think our margins are going to be affected. We've already walked away from a fair amount of business in one of our segments because I think we talked about it in one of our couple other calls ago, we're not in it for practice. We know how to do it, and there's still some people out there that are pricing very foolishly, and we won't participate.

We've got, we've got a great strategy now, David. We're going to execute it. You're going to see our sales grow. You're going to see our markets stay firm. And you're going to see some pretty good things out of Universal Forest Products this year.

David, it's certainly our goal to maintain the margin improvements that we were able to achieve this year and continue to build on that by increasing productivity as we grow sales. We had our 2012 goals about improving our productivity and enhancing our profitability through cost reductions, still right on our radar screen.

Also, I may have missed it, but I did not remember hearing anything said about new product introductions or how those products introduced in the last 12 to 24 months have been doing. Could you update us on that?

David, we've introduced a fair amount of products in the marketplace over the past 12 months. Like any new product, we're getting them in the stores. We're getting them set. They are new products, and, to be honest, they are doing quite well. But it's early to give you any kind of numbers of how well. But the fact that we're bringing some different products in that -- to be honest with you, some of them aren't even wood-related. In fact, a lot of them aren't.

And they are bringing us some better margins and we're excited about what we're bringing into the marketplace and what we've got coming down the pike that we really don't want to disclose on the call right now because we do have people that listen to this that come after us with it. So we've got some pretty good things coming down the pike.

And the last question, in terms of the sales increases that you are looking for, how much of that will come from new territories from existing accounts and how much of that comes from adding inventory items to the existing region that you already have with those accounts?

I think that there's a fair amount that's going to come from new products that we're going to bring into the marketplace. I would say that the bulk of it's going to come from that, David.

Okay, thank you very much.

Your next question comes from the line of Trey Groom of Stevens. Please go ahead.

Hi, Trey.

Good afternoon, guys. Just a couple of quick questions. One, you guys, you know, obviously generated significant amount of free cash in 2009, and I'm sure you'll generate a decent amount of cash flow in 2010 as well. And you're sitting with quite a bit of cash on the balance sheet. I know you increased your dividend, but what is your intended use of cash look -- as you look into 2010 and 2011, by priority, looking out there?

Yes, I, I'll take that one, Trey. I think on the last call we mentioned expansionary, capital expenditures and capital expenditures in general. We expect those to be around $32 million for the year, so CapEx certainly is one. At the current semi-annual dividend rate, we'll have $8 million in dividends. We still will be engaged in share repurchase activity when it's at a price target that makes sense for us. We pretty much have done volumes where, to prevent any dilution under our benefit plans. But most significantly, we'll be looking at acquisitions and looking to grow the business. And I would think that the bulk of the capital will be used for that purpose.

Okay, and, with your -- the debt paydown that you accomplished over the last year or so, when mentioning acquisitions, do you -- would you care to give us an idea of what your comfort level would be if the right acquisition came along, as far as increasing leverage again?

Well, we remain committed to making sure we have a conservative balance sheet. And, when we look at our capital structure, we look at debt to EBITDA as the baseline measure for what we're comfortable with. And in debt to EBITDA, about one and three quarters, two times is where our comfort level is.

Okay, great. Okay, and then you talked about increased sales in 2010, and I know you hit on it again with the prior question. But so do you think that those increases -- I know you mentioned new products, but do you think that those increases will be across the board when you look at your different divisions, or do you think it could be more from just one or two of the different divisions that you guys have?

Are you referring to our DIY versus our industrial markets, Trey?

Yes.

I think our biggest growth that you'll see will be in our industrial markets. Within that grouping is our Pax group, which is our new packaging and container solutions, a program that we started out about 15 months ago. We really haven't talked a lot about it because we're trying to fly under the radar a little bit. But you'll see in calls in the future, we'll probably talk about that and some pretty good growth that we've got.

Our concrete forming is a really good initiative for us. Unfortunately, we have a lot of projects slow down here in the last half of '09. The manufactured housing is a segment that is, that is flat, but we have a strategy where we are going to put more products in the house and that's products that are outside of the core of Universal. So you'll see, if we execute this strategy, you'll see some pretty good growth there also.

Okay, that's real helpful. And then I guess my last question, when you look at SG&A, looks like -- I mean you guys have done a great job of pulling that number down and I think, we've talked -- I think I've asked you this question before in the past about how much that could sustain, or how much top line growth that level of SG&A could fuel against. And I think you had mentioned 5% to 10%. Do you still think that's a good number?

Because I mean you guys -- the fourth quarter was a, in my opinion, was a great SG&A number for the level of sales you guys put up. And just trying to get a feel for, okay, if your sales are up and I think you said 5% to 10%, could you still, maintain that level of SG&A in 2010, if we were to see that level of growth?

Yes, we think so. That's certainly our goal, to be able to grow sales by that type of an amount and still hold the SG&A costs at that run rate you're mentioning. One thing I should point out for Q4 is that, because it was more or less a break-even type of order, there isn't any bonus expense in that number, so that gives you just a pure baseline look at what our core SG&A is. And so in quarters when we're much more profitable, that number will spike up with bonus expense.

Sure, okay. Great. Well, thanks a lot.

Thanks, Trey.

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

Hey, Bob.

Guys, good afternoon.

Hi, Bob.

Just maybe a point of clarification. Mike, when you called out the individual segments pricing unit comparisons from a year-ago period, was price a positive factor or a detractor in the quarter?

I didn't mention it. We're still developing the price versus quantity part of our sales change, but I think what you'll want to do is, the dominant part of the sales change is unit sales decline.

Okay, so price wasn't too much of a factor.

Not as much of a factor, no.

Now, when you talk about 2010 being a growth year, would lumber prices be additive to that, on top of volume growth? Just trying to think about how lumber would start to rise a little bit off the depressed lows. How should we think about 2010?

Yes, lumber will certainly, will positively affect sales when it moves up by $40 to $60 a thousand, that will have a positive impact. But we're talking about beyond that, growing our sales.

So when you talk to 2010 growth, you were talking about the unit perspective?

Right, yes. Although, although, again, with the market being up, that's additive as well.

If we just exclude the -- whatever number is going to (inaudible) --

It's included.

Right. So do you assume the market for industrial and DIY starts to grow in 2010, and then you have share gains in the product growth on top of that drive in volume? I'm just trying to think about how you get to the growth for 2010. Has the market bottomed and it starts to recover a little, or do you expect just flat from here?

We, we think that -- we think that our housing segment is going to be flat. We think that there's going to be modest growth in the DIY. We'll see a little, a little better than modest growth on our industrial, from an organic. Now, from what we add, we see a pretty good growth in these segments.

Got you. Okay. And then just on the acquisition pipeline, it sounds like the multiples being asked aren't quite reasonable or you're just not -- is it more the multiples aren't quite reasonable, or you're just not finding that good fit for Universal?

Robert, we've had some really good acquisitions that we've worked on, some, to be honest with you, have been pretty surprising, but we just weren't going to leverage the future of our Company just to make an acquisition. So we've got two or three we passed on, and we've got three or four we're working on right now that, if they can align with what we think is a fair value, we'll pull the trigger.

Understood. And then as far as the few that you passed on and the few that you're still looking at, would they be more complementally bolt-on type or something of more significance?

They will be outside of what we presently do, but they will be within the industry that we're in.

Excellent. Thanks, guys.

Thank you.

And your next question comes from the line of David Zelman of Zelman Associates. Please proceed.

Hi, gentlemen. How are you?

Good.

Great.

Can you help me with the correlation to unit volume of single-family residential and then maybe what you're seeing in January. From what we understand, residential unit volume in the back half of January is picking up in orders, maybe as much as 25% or 30%, so although you're looking for flat residential, if unit volume was up 25% year-over-year in calendar 2010, what would that do to your business? And are you beginning to see some pickup in demand because there's more single-family residential building activity going on?

First of all, I hope you're right, that single-family housing will increase by 25%. We don't believe that. We think it's going to be a very modest increase. We've seen false starts for the last two quarters, and we're seeing it now. We hear the same things from some of the builders, that they have got some business and they are building, but to be honest with you, we don't see it.

Now, if it happens -- . We're in the component business, so when you look at our business in the next quarter, realize that we don't -- we would like to sell trusses and wall panels and floor systems. We -- we're not into doing piece pull lumber. We're not into doing moulding and millwork. We're not into doing drywall. We're into components where we're very, very good and we are the low cost producer. And that's our niche. That's where we're

And if those markets do improve, our sales guys are very aggressive. They will get the orders, and we've got a lot of underutilized capacity. We'll be able to adjust quickly.

Thank you.

At this time, there are no further questions in the queue.

All right. Well, thanks, everybody. We know it's late in the day. We appreciate you taking the time to listen to us, to listen to us today. I'm going to go across the street now and listen to 60 of our general managers and VPs tell us how we're going to grow sales.

But, I want to leave you with this. We do what we say we're going to do. And we will grow our sales, and we will grow our profits in 2010. And you can write it down. Thanks for your time.

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