UFP Industries Inc (UFPI) 2010 Q2 法說會逐字稿

Great day, ladies and gentlemen, and welcome to the second quarter 2010 Universal Forest Products, Incorporated, earnings conference call. My name is Katina, and I will be your coordinator for today. At this time, all participants are in a listen only mode. We will facilitate a question-and-answer session towards the end of this presentation. (Operator Instructions) 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 2010 conference call. On the call today are Chief Executive Officer, Michael Glenn, and Chief Financial Officer, Michael Cole. Please be aware that statements included in this call that are not historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act as amended and are based upon management's beliefs, assumptions, current expectations, estimates and projections about the markets we serve, the economy and the company itself.

Words like anticipates, beliefs, confident, estimates, expect, forecast, likely, plans, projects, should, variations of such words and similar expression identify such forward-looking statements. These statements are not guaranteed future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. 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 all forward-looking statements involve risks and uncertainties.

Among the factors that could cause actual results to differ materially from forward looking statements are the following. Fluctuations in the price of lumber, adverse or unusual weather conditions, adverse conditions in the markets we serve, government regulations, particularly involving environment and safety regulations, and our ability to make successful business acquisitions. Certain of these risk factors as well as other 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 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 and good morning, everyone, and thanks for joining us this morning. While I know some of the numbers aren't what you expected, I need to tell that you given the challenges that we faced in the quarter, I am proud of the performance that our people turned in. In the 36 years that I've been with Universal, I've never seen a lumber market like the one we experienced in the second quarter. The last time we talked, I said that one of the things that could hurt our performance in the quarter was the volatile lumber market, and that's what we got.

As most of you know we never talk about the market, and its effect it has on our earnings, but this was a very highly unusual situation. We started the year with a lumber composite price of $2.48. We worked with the market as it increased steadily to a high of $3.67 by the first of May. Then came a sudden and steep drop in the composite price dropped to $120 a thousand in less than eight weeks. And this significantly affected our performance in June. It was the perfect storm of circumstances.

Prices rose quickly at a time when we were buying lumber to meet our spring needs and giving us a higher cost inventory. Then they dropped even quicker in the weeks we were busy selling products that are indexed to the current lumber market. I've never seen anything like it in my career, and to be honest with you, I don't expect to see it again. But I am proud of what we were able to do in this environment. We grew sales in each of our markets, and our people continued to identify opportunities for growth and create efficiencies in order to grow our capacity, sales, and our strength.

If the challenge of the quarter was the lumber market, the opportunities were concentrated in our industrial and manufactured housing markets. In industrial, we found more opportunity for growth with new customers. Once again, we added a few hundred new customers in a single quarter. Still, we estimate that our market share in industrial remains in the single digits. So we know that there is lots of opportunity for growth.

We grew our manufactured housing sales by 83%. In part because of HUD code homes in some parts of the country were as strong as we have eve seen in recent years. Some of that was due to the tax credits available to homebuyers. But even without those incentives, sales in the markets were stronger than we've seen for this period of the year. We also grew our sales in manufactured housing by growing our distribution business through the acquisition of Shepherd distribution. With this purchase we significantly added to the products we offer to our manufactured housing customers. We now distribute everything from shingle underlayment, house wrap to siding and plumbing products.

This is in line with our commitment to grow our business by offering more products to our customers and helping them consolidate their vendor base. We grew our sales to the DIY by maintaining a strong business with the big box customers and beginning to grow our business with independent retailers. While this market remains relatively flat, we expect to see it increase slowly but steadily in the coming years as the housing market recovers and pent up demand for home improvement projects makes this -- makes it to the stores. We continue to add products that we're bringing to our retail customers and we're excited about the new lines of decking and accessories we brought this year.

In addition, we're in the early stages of a project with the internationally known company to introduce products that are like no other offered in the composite market. We are very excited about this opportunity and look forward to be able to talk about it more in the quarters to come. Our growth at site-build sales occurred in part because of some increased activity in the marketplace in addition to higher prices and because of our focus on commercial and government work. We believe the housing market is years away from regaining significant strength and growth trends. So our strategies for growth are more highly concentrated in other markets.

And that's what's so great about Universal. Our diverse business model allows us to seek opportunities in many areas. If we had been tied to only site-built construction or DIY in a quarter like this one and where the lumber market put cost and pricing at odds, we wouldn't be here talking today about our profitability and our increased sales. Universal's strengths are in our business model and in our conservative practices and philosophies that allow us to maintain an exceptionally strong balance sheet.

Our sales and profits are where we'd like them to be? Not really. Are we on the right path to achieve our goals? Absolutely. We're making all the right moves and controlling what we can. We have a strong book of business, a solid balance sheet, and the resources we need to take advantage of any opportunities that come our way. I'm pleased with our position and excited about what the future holds for us. Now I will turn it over to Mike Cole for business review, and then we'll wrap it up with questions. Thank you.

Thanks, Mike. I'll start by reviewing our income statement for the quarter. Our sales for the quarter increased 24% driven by higher selling prices due to the lumber market and unit sales that were 9% higher for the quarter.

By market, our sales for the DIY market increased 8% due to an 11% increase in selling prices, offset by a 3% decline in units which was in line with the decline in unit sales for our big box customers. Our sales to the manufactured housing market increased 83% due to lumber prices and a significant increase in unit sales. Units increased because of improved market activity as well as new product lines we've added by acquiring certain distributors. Our sales for the cycle construction market increased 19% due to an 8% increase in selling prices and 11% increase in unit sales. By comparison, national housing starts increased 25% for the period.

As a reminder, we may continue to trail the market somewhat over the course of the year due to plant closure actions we took later in 2009 in order to meet profitability and cash flow goals. Closed plants caused a 9% decline in sales for the quarter. Finally, our sales for the industrial market increased 36% due to a 22% increase in unit sales and a 14% increase in selling prices. Our increase in unit sales was primarily due to the many new customers we've added since last year and continue penetration into the concrete forming market.

Moving down the income statement ,our second quarter gross margin decreased to 12% from 16% last year, and our gross profit dollars decreased by 6% comparing unfavorably to our 9% increase in unit sales. On our last call we mentioned one possible headwind to maintaining our gross margin improvement was the potential for an unusually volatile lumber mark, and that's exactly what we saw in Q2. As Mike said, the rapid rise in the market until the end of April increased our costs and negatively impacted our profits on products we sell at a fixed price.

Normally we could work through this as a single issue, but it became exacerbated by the sudden drop then in the market from the end of April through the end of June. So we had two major challenges. First, working through higher cost inventory. Second, having lower selling prices, particularly in June, on products we sell at a price that's indexed to the current market. As we mentioned in our press release, our profits in April and May were quite good but our margins and profits in June fell dramatically due to the situation.

Nevertheless, we were pleased to again achieve lower labor and overhead costs as a percentage of sales due to efficiency gains. This helped offset some of the decline in margin due to the lumber market. We're also pleased to report SG&A expenses decreased by $2 million to 3.5% for the quarter even though our unit sales increased by 9%. Improvement in SG&A was primarily due to a decrease in bad debt expense and efficiency gains. Bonus expense also decreased for the quarter.

Finally, as a reminder, in 2009 we had $1.1 million gain on the sale of certain real estate included in operating income. This contributed about $0.04 a share to our EPS in 2009. We didn't have any gain of that nature in Q2. And the first six months of 2009 we recognized $3 .5 million of gains on the sale of real estate. Again, we had no gains in 2010.

Moving on to our cash flow statement, our cash flow used in operations was $50 million this year, comprised of an $86 million increase in working capital since December offset by almost $15 million in earnings and $21 million in noncash expenses. The increase in working capital is simply due to the seasonality of our business. We were pleased with our working capital management this quarter which was highlighted by a one day improvement in each of our receivable and inventory cycles. Capital expenditures total almost $12 million for the year so far. We still expect to spend approximately $32 million for all of 2010.

In April 2010, we purchased the assets of Shepherd Distribution for approximately $5.6 million. Shepherd distributes a variety of different products to the manufactured housing industry and has annual sales of approximately $12 million.

Finally, our cash reserves -- finally, we used our cash reserves and borrowed about $15 million on a revolving credit facility to fund seasonal working capital requirements and investing activities. Our net debt at the end of June was about $47 million. As the primary selling season winds down in Q3 and our working capital drops, we expect to build a large cash surplus through the end of the year as we did in 2009.

So to summarize, our industrial and manufactured housing markets represent real bright spots and provide with us a good opportunity to grow our overall sales again in the back half of the year. Our people did a great job of managing through an extraordinarily difficult lumber market. And while we're disappointed at what could have been, we're pleased with the efficiency gains we realized in the plant and in SG&A and are optimistic about what this might mean for future margins.

Lastly, our working capital management is good and we still expect to have strong cash flows for the year to continue to give us the best balance sheet in the industry. That's all I have, Mike.

Thanks, Mike. Now I'd like to focus on giving you the information that you need, so we'll open it up for any questions and comments that you may have.

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

Good morning. This is actually Will on but good morning. So I wanted to start, you talk a lot about the weak June, and I know it's early, but how would you characterize what we're seeing so far in just the first part of the third quarter?

We see sales holding fairly well. The DIY business is kind of flat, which is what we expected. Our industrials still very, very solid and good. Our manufactured housing business is, although it's not on the pace of 82%, it still has a nice increase to it. And the last thing we're working on is we think we've got about another two weeks before we flesh out some of the higher priced inventory that we acquired earlier in the year.

Great. And then I also wanted to touch on, have you guys taken a look at how margins fared in the first couple quarters versus June? I mean how do you think it could have been different if you exclude June?

Well, I think April and May comped really well versus last year, but if you look at the numbers for the quarter, we would have expected -- if we had 9% increase in unit sales we would have targeted our gross profits to increase by -- gross profit dollars to increase by 9%. Actually, more than that because of the labor and overhead gains. So it really had a profound impact on the numbers we scored. It's really, really difficult to manage through a drop of $120 a thousand, when you are selling at today's market and you bought something that's $80 higher than what you are selling it for, that's a very difficult process for us. And like I said earlier, that's why we're certainly disappointed that we didn't have better results, but we're not disappointed in our performance and what our folks did. We didn't -- we certainly don't have excess inventory. We didn't make any mistakes in buying too much. It was well managed through that quarter. It's just that that -- I've never seen it drop like that.

All right. They have been very volatile. And with that said with the sharp pull-back we've seen, do you guys view the pricing now in the lumber market as kind of a good time to jump in, or are you still trying to be kind of cautiously optimistic? How are you kind of viewing that aspect of the business right now?

We think the market is pretty much -- is stabilized. To be honest, it moved up a couple bucks a week or so ago. We don't see it falling again, and we don't see -- we'll see a little bit movement up, and we'll see a little bit movement down, but we think we're kind of where we're going to be for awhile. We aren't going to be take any positions. We've seen the best part of the year from a DIY side, and whatever business we have for our site built, we buy in accordance with the orders that we have. The other thing we didn't talk about, certainly, we talk about the lumber market, but what really impacted us in the first quarter was OSB, which had a $200 a thousand drop. And for all that site-built business that we had with OSB that printed big negatives.

All right. And I just had one more. You know, the industrial business looked outstanding again this quarter, and sales were up 20% year-over-year, and you mentioned market share gains. I wonder if you could maybe talk about how much market share gains added to that 20%.

Actually the number was more like 22, but that was predominantly new customers and market share gains.

Great. Guys, keep up the good work.

Thank you.

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

Good morning.

Good morning, Bob.

Just a question on -- don't know if you have it yet -- the mix between value add and commodity in the quarter.

Yes, it's about 60/40. Didn't change much.

When you talk about the prime June, is it solely tied to the commodity lumber and in decking, or are you seeing price pressure on the finished -- or the fixed good priced products as well?

Both. You had two different things going on in the quarter.

Just as it relates to June.

Oh, as it relates to June? Yes, exactly. It's a fall in the market as relates to the commodity type product like treated.

It looks like you were successful raising prices during 2Q. Do those stick as you start to run some of the lower cost material and flush out the higher costs, or do your price increases also moderate?

That's a tough one to answer because some of our pricing will definitely stick. It's 30 or 60-day pricing. Some of the pricing becomes a two-week pricing so we will see some drops. I'm not trying to be vague, but that's kind of how it works. It depends on the market segment that we're in. We bid for the housing segment, we'll bid a job with particular production builder, and that price is fixed for a certain period of time. When we deal in the DIY, our pricing changes every week.

Right. So now basicallily, with the drop-off you saw in June, the unprecedented drop, probably not another 80 or 100 per thousand for board footdrop coming, as you see it. Do you have the ability to maintain prices where they are, or do you still see some downward move in your pricing?

No, what we're seeing is the market -- actually, the market moved up a little bit, a couple weeks ago. We got a $2 to $5 bump, and we see what's happened is when the market came down so severe that the primary mills started working on shutdowns, and they just -- they had had enough so we saw some extended closures over the 4th of July week. We've seen some other permanent closures of some mills, and it's now created a situation where you've got a good backlog in the mill, and they don't have to be selling lumber like they were earlier.

Great. Now, over the past couple of years, you've done a lot to lower break-even point in the site-built unit. Are you seeing -- I know you lost money in prior years. Are we back to where we're profitable, or break even in that segment?

No. We lost money in Q2. And for the year so far. Got it. A lot of that relates to the run in the market in the higher costs when you sell -- when your sale prices are fairly fixed for party.

Oh, understood. And now just on the industrial segment, is there any reason, given the fact that you are adding customers and you are seeing an improvement, albeit it sluggish in the economy, why that growth rate that you've seen thus far in 2Q couldn't be the norm for the rest of 2010?

The growth late at 22% in unit sales that we've seen so far, whether that's sustainable? New customer growth. We're looking at that being a continued strong grower back half of the year.

Great.

I'm not going to try to peg a number, but we're expecting very strong double-digit growth out of that market.

Excellent.

Really, for the foreseeable future.

Your next question will come from the line of David Leibowitz, representing Horizon. Please proceed.

Morning, David.

Morning, David.

Two brief questions, if I may. First, can you quantify for us what the second quarter would have been were it not for the dipsy-doodle of pricing on lumber?

The best answer I can give you, David, is to say that we would normally -- if our unit sales are up 9%, our goal is to have our gross profit dollars up 9%. So use last year as a base, increase it by 9%, plus we feel like we created about $5 million or so in efficiency gains on labor and overhead. So add that to it, and that's what it could have been.

The second question is looking at the second half of the year as you've gone through the various operating units is there anything in the equation that would make us believe you were not going to be able to beat the third and fourth quarter of last year respectively?

We're not providing guidance and estimates on Q3 and Q 4, but like I said, and like Mike had said earlier, we're looking to grow sales the back half of the year. We think industrial and manufactured housing in particular give us a great opportunity to do that. That we are working through some of the higher cost inventory for the first few weeks or so in July, but, you know, you look at efficiency gains and everything else, we're very optimistic about the back half of the year.

And, last question, if I may, very little was said about the market for acquisitions at this time, and given the consolidation the industry has gone through and continues to go through, and the fact that Universal has been an active player in this arena, can you update us on the outlook there and management's thinking in terms of whether or not they would be willing to make acquisitions at this time?

Yes, David, we -- I can tell you that we are -- we are looking, and to be honest with you, we're looking to make some acquisitions from an industrial standpoint that's a segment that we're focusing on, and we're continuing to look for a good fit there. We may look at trying to do something in the DIY segment also. We are not looking in the site-built arena right now for an acquisition. We just think that that business is years away before it's going to come back. We made the acquisition last quarter with shepherd product in a distribution play in the manufactured housing, and maybe there's another one or two players that we can put on top of that one and have a pretty good distribution business for manufactured housing. That's our strategy right now.

Thank you very much.

Thanks, David.

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

Good morning, Keith.

How are you guys doing?

Great.

Just a couple questions. Maybe first off, trying to understand maybe how your underlying volume trends moved as you came through the second quarter. In other words, I guess on some of the segments you've added new customers. In certain market segments you've added new customers and picked up some acquisition. Just trying to get down to what that underlying organic demand trends what they kind of look like as you move through 2Q.

In some respects, that's a little tough. Especially it is a relates to manufactured housing and site build, because you do have the influence of the tax credits. And so you pull that away, and you wonder how much impact did that have in -- so we are left guessing a little bit. We think that the -- the order files that we're hearing from our customers are still good, going into the back half of the year for murder housing. How good? We're not quite sure. But they're good. And industrial, like we said earlier, we're still expecting very solid growth there. But not only back half of the year but in the future.

Okay.

DIY was a bit soft, as you saw in the release.

Okay. And that was, I guess, my next question. It seemed to suggest, if I read it correctly in the release that maybe it came out of the second quarter with what seemed to be a good bit of inventories in that channel, or the demand patterns were slow and the customers in that channel were left with a good bit of inventory going into 3Q. That the way to think about the DIY channel?

Pretty much, Keith. We -- in the first quarter we usually -- late in the fourth and early in the first we buy and build inventory to ship into the second quarter. Busy season that obviously starts around the middle of May and finishes up around the 4th of July. And so we've got to have material on the ground. The last thing we can do is run our big box customers out of wood. So, yes, we build up then, and like we said, we're in the process now of working through some of that inventory, but we're in pretty good shape. The one comment I would like to also make when Mike was talking about our growth, and that is some of the -- some of our growth in our industrial came through as a result of some CapEx moves we made, putting in some new equipment, putting in some high-speed quality kilns in some of these industrial plants that generated new sales and new customers, and so based on that success, we're looking at doing that in other parts of the country. We also added, in the DIY, to help mitigate a little bit of the slowdown, we did add some new products into the marketplace that helped our sales so we're not just sitting on what we had. We are adding product. We are making investments in the business to come out with new ideas and new products to bring to our customers. So, like I said, we're pretty happy with where we're going right now.

Okay, and then maybe you can just come back to that gross margin question that seems to kind of come back and forth on the call. Try to understand maybe, can you put it in a matter of basis points, how much difference January's gross margin was relative to kind of April and May? Is there a way to think about it from that standpoint to kind of frame how much that lumber impact may have been a factor?

We had some lumber -- I'd rather not go month by month necessarily on margins, because, quite honestly, there's some lumber market impact, in May, too. It was just mitigated by the better volumes that we had in May. Of course, this last year. For the quarter, you know, basis points standpoint, 4.5%, I think our material costs as a percent of sales were up over last year for the quarter.

Okay. Then I guess final question, share repurchase during the quarter.

Yes, we did -- we've done about 100,000 shares repurchased so far for the year. And we will continue to look at buying back shares second half. We haven't bought anything the last few weeks because we've been in our blackout period.

Thanks.

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

Okay, thanks for joining us on the call today. Thanks for your interest and support of Universal Forest Products. We've got to now go back and get busy and keep growing sales and work on our margins again. So thanks for your time today. Talk to you later.

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