UFP Industries Inc (UFPI) 2010 Q3 法說會逐字稿

Great day, ladies and gentlemen, and welcome to the third-quarter 2010 Universal Forest Products, Inc. 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). 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, everyone and welcome to Universal Forest Products' third-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 on management's beliefs, assumptions, current expectations, estimates and projections about the markets we serve, the economy and the Company itself.

Words like anticipates, believes, confident, estimate, expects, forecast, likely, plans, projects, should, variations of such words and similar expressions identify such forward-looking statements. These statements do not guarantee 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 that 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 environmental 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 Products. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed 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. First of all, let me say that no one is more disappointed in our inability to meet our projections than I am. We don't set out to underperform; we set out to exceed expectations every day we come to work. We don't like the quarters like we've just had and we are going to work hard to make sure they don't happen again.

I believe that we managed what we could and simply continued to feel the effects of a volatile lumber market and a weak economy. We didn't hit our earnings, but we grew sales in some very tough environments and we maintained a strong balance sheet that keeps us on solid footing and allows us to look forward with confidence.

We initiated strategies in the past 18 months that are starting to pay dividends in each of our markets, strategies that continually enhance our diversification and add to the products we bring to our customers. With a focus on military, multifamily and commercial and the closure of unprofitable operations, our site-built business right now is as strong as it has been in three years. In fact, our site-built business is now profitable.

In industrial, we are adding new customers and products and we are seeing growth in concrete forming and packaging material. In manufactured housing, we are growing our value to our customers and bringing more products to their doors. In the DIY and retail, we are encouraged by the results of our focus on independent retail sales, something we haven't done a few years ago when much of our site-built business presented channel conflicts for sales to pro dealers.

We were disappointed in our sales to our big-box customers, but pleased with the advances we're making with other retail business. We were equally disappointed with our drop in margins, but I can't imagine a circumstance again that would lead to such challenges with inventories.

We continually evaluate our position in our markets and make sure we are sized right for our business opportunities. In the second quarter, we talked about higher inventories because of the soft sales in that quarter. While the drop in sales hung on longer than we anticipated and adversely affected our margins, a lot of our value-added sales of products with higher margins like fence panels, deck accessories and our consumer products, didn't materialize much in the third quarter.

With higher inventories, we weren't in a position to go into the market and make opportunistic buys. We felt it was more important to get our inventories in line for the long term. That was in stark contrast to the buying strategy and opportunity we faced and took advantage of during the first three quarters of 2009.

That said, we have worked through most of our high-priced inventory and I am pleased to say that our inventory cost today is the lowest it has been all year and is about 6% higher than last year.

Are we pleased with our performance? Not at all. Are we confident in our ability to find strong, sustainable opportunities for growth that will be a path to our new sales and success? Absolutely. I look forward to returning to the days of strong sales and profitability. We are working hard to get there. I am proud of our performance given the challenges we have faced. And I know that brighter days are ahead. Now I'll turn the call over to Mike Cole.

Thanks, Mike. I will start by reviewing the income statement for the quarter. Our sales for the quarter increased 5%, driven by slightly higher selling prices due to the lumber market while unit sales were flat. By market, our sales to the DIY market decreased 8% due to a decline in unit sales as a result of soft consumer spending.

Within this market, our mix changed as well. Sales to our big-box customers declined 13% while sales to other retailers increased 11% due to market-share gains. Our sales to the manufactured housing market increased 18% due to higher year-over-year lumber prices and a 12% increase in unit sales. Units increased primarily due to the new product lines we have added by acquiring certain distributors. According to the Manufactured Housing Institute, production of HUD code homes increased about 3% in July and August.

Our sales to the site-built construction market increased 2% due to higher year-over-year lumber prices offset by a 4% decrease in unit sales. By comparison, national housing starts decreased 6% for the period.

In the future, we may continue to trail the market somewhat due to plant closure actions we have taken. Closed plants caused an 11% decline in unit sales for the quarter.

Finally, our sales to the industrial market increased 19% due to a 12% increase in unit sales and a 7% increase as a result of lumber prices. Our increase in unit sales was again due to the many new customers we have added since last year.

Moving down the income statement, our third-quarter gross margin decreased 3.8 percentage points and our gross profit dollars decreased by 21% despite flat unit sales. As Mike indicated, the decline in profitability this quarter was again due to the impact of the lumber market.

At the end of June, our inventories consisted of products purchased earlier in the year when lumber prices had dramatically increased. When lumber prices stabilized at a low level, this adversely affected our profits in the third quarter when this higher-cost product was shipped. Unfortunately, demand also softened at the end of Q2 and it took us longer than we expected to work through this inventory.

As a result, the material costs as a percentage of sales increased by approximately 4.6 percentage points year-over-year. On a positive note, lumber prices stabilized during Q3 and the cost of lumber in our inventory at the end of September reflects current market prices. Also, we achieved lower labor and overhead costs as a percentage of sales again this quarter due to efficiency gains. This helped offset some of the decline in gross margin due to the lumber market.

We are also pleased to report SG&A expenses decreased by about $3.9 million, or 7.6% for the quarter. The improvement in SG&A was primarily due to decreases in bad debt and bonus expenses.

Moving on to our cash flow statement, our cash flow from operations was $13 million this year comprised of $17 million in earnings and $32 million in non-cash expenses offset by a $36 million increase in working capital since December. The increase in working capital reflects higher inventory levels at the end of September due to softening demand.

Investing activities included capital expenditures of almost $16 million for the year so far. We currently plan to spend up to $28 million for all of 2010. In addition, acquisitions primarily consist of $5.6 million spent to purchase the assets of Shepherd Distribution in April. In July, we spent $4.6 million to acquire technology we plan to use to produce new products.

Finally, financing activities consisted primarily of dividends and repurchases of our stock. We have remaining authorization to repurchase up to one million additional shares.

With respect to our balance sheet, our cash reserves increased sequentially to $58 million and our debt was only $53 million at the end of September. Absent a significant acquisition or share repurchases, we expect that our cash surplus will continue to grow through the end of the year as sales and receivables decline in our typical seasonal trend. Go ahead, Mike.

Now we will open it up for questions.

(Operator Instructions). Trey Grooms, Stephens.

Hey, good morning, guys. This is actually -- can you hear me?

Yes, we can. Can you hear us?

Yes, yes. This is actually BG sitting in for Trey this morning. This is my first question. I had a question related to DIY and sales growth there. Going back to the Q2 conference call, I believe you guys stated that the third quarter had actually started off kind of in line with expectations and that revenues were flat. So granted, it was only a couple of weeks into that quarter, but can you give us some kind of clarity as to kind of the trends that took place during Q3 with respect to DIY and kind of where we are today?

The first few weeks maybe into the quarter was like you said was pretty good, but sales for the quarter just declined a whole lot more than we thought, which caused us some problems working through some of our inventory. And what was really kind of surprising in the quarter was that our mix had a big shift. Typically, in the second and third quarters, we do a lot of specialty stuff. Our fence panels, our deck parts, our consumer products and those sales were off dramatically compared to years past. So those had the higher margins, so that was another factor that affected our margins in the quarter.

Luckily, our strategy that we started 18 months ago of trying to move into the pro yards or the independent dealers that we hadn't chased for years really kind of helped out our DIY business and our box business is off somewhere in the neighborhood of 10% to 15%. So if we hadn't gone through that strategy, it would have been a really tough quarter.

Okay, and then just kind of building upon the margins there, it is good to hear that you guys have now run through the high-priced inventory, but just kind of given the lag effect sometimes with how your business works, kind of two questions. One, can we still expect a little bit of kind of a lag effect related to margin headwinds as we head into the quarter at the end of the year here? And then if you strip out that kind of -- can you give us an idea of where margins would have been if inventory levels would have kind of been more normalized?

Taking the second question first, we got efficiency -- I think our labor and overhead and outbound freight costs were about 0.8% of sales lower than they were last year at this time. So if you -- we would have hoped, with a normal lumber market, we would have had higher margins by roughly that amount for Q3.

Okay, so about 80 bps?

Pardon me?

About 80 basis points?

Yes.

Okay.

BG, the other thing is the sales in the fourth quarter are typically, pretty tough and at this point in time, what is going to affect our margins is volume and if we had a very severe November, December and aren't able to run much through our plants, it will certainly drive up our costs. But to what we said earlier, our inventories are totally in line now. They are the best they have been since January and that is not an issue at this point in time. We are seeing increases in three of the segments that we are in right now.

Okay, great. That's helpful. And then just my last question and I will pass it on was just if you could give us some maybe further bullet points on the site-built segment because that was kind of surprising on a good side there to hear that that is now profitable because I think when we last spoke, you guys had said that profits were still kind of negative and trending along there. So what's kind of going on there? And what's moving the needle?

Yes, let me -- I made that statement; let me just clarify. We closed -- we exited the state of California. We closed our Southern California and Northern California operations and then as I looked at it, we have got some other plants that we are looking at shuttering and when we pull those out, based on the plants that we have now, we are in a profitable position.

And a lot of that is due to, again, the strategy that we started 18 months ago. It was a shift from the production builders more into the military and multifamily and commercial business. Whether that is sustainable in the fourth quarter, that I am not going to say, but we were very pleased with what happened in the third quarter with our site-built business.

Okay, thanks. That's very helpful. I will pass it on.

Steve Chercover, D.A. Davidson.

I guess my first question is a little bit on the lines of the previous speaker. Last quarter, you indicated that you were very optimistic for the second half and were looking to grow business. So first of all, when you say growing it, was that year-over-year or sequentially? What was your expectation?

It was year-over-year. We thought we would be growing year-over-year sales in Q3 and hopefully Q4. And we thought that we had enough legs in the industrial side to be able to do that. And the manufactured housing with the acquisitions and the order files were still pretty good at the time. We were hopeful that we could accomplish that and we did for Q3.

How much visibility do the big boxes give you for their next year purchases?

That's a good question, Steve, in the sense that that was part of our problem in the quarter in that they kind of give us a look-see and tell us that they want X amount of this product and make sure that we have it because they are going to take it. And their sales were off so far that the material that we had bought, based on what they wanted, they didn't take and we were kind of stuck with higher-priced inventories. And midway through the quarter, we made a decision to start peeling some of this off and selling it to -- outside the big-box at obviously margins that weren't acceptable. But we had to get out from underneath it.

They give us -- the guidance that they give us, Steve, is we are going to grow our sales by 10% and we are going to grow our sales by 5% and we expect you to have that material on the ground. So in many ways for us, it becomes a crapshoot and we really have to -- we have to manage it very carefully.

I don't suppose there is any opportunity to transform it to a take-or-pay business model?

Well, I would love to have you come in and make that call with me, Steve.

Well, I have got Teflon armor. Switching gears, your sales to HUD code homes are doing well. Is that growth -- do you believe there is long-term growth beyond just your acquisitions? Are people who can't get into conventional homes migrating back into that type of shelter?

That is our belief. Our belief is that, when this whole thing settles out and we get rid of all these houses, these shadow inventories and foreclosures, all that, when we get rid of that, manufactured housing and mobile homes offer affordable housing for America. Not everybody can move into a $250,000 house and those that did during this uptick were -- had a shock and now they have lost their house and so we believe that it is going to move up. It is certainly not going to go to the heydays, but we think that we are certainly going to get up above 100,000 units.

Okay, and final question. Your comment that site-built residential homes will be in the doldrums for years was not really encouraging. At some stage though, does there have to be some sort of snapback over the line? I mean aren't we building up some pent-up demand?

We may be, but we have got so much shadow inventory sitting out there that, from what we can see, we have got a good 24 months of problem inventory out there. And if we didn't think that, trust me, we wouldn't have exited the state of California.

I guess that speaks volumes. Okay, thank you.

David Fondrie, Heartland Funds.

Yes, good morning. I had a couple questions. Could you give us a little color on the industrial segment? It was down sequentially I guess something over $15 million or so. Is that normal? Is that a seasonal pattern and just a little bit more color on what is happening in that particular sector.

Our year-over-year growth in industrial I think in Q2 was about 20% unit sales growth. This quarter was 12% unit sales growth. So we have been very, very pleased with our growth in industrial. And it is all coming through market share gains. So at some point here, demand kicks in and if we are still able to gain market share at that clip, we are going to be very pleased with that.

So that is a seasonal pattern, that it is down from Q2 to Q3?

I'm sorry, I haven't looked up the seasonal between Q2 and Q3. It wouldn't surprise me though if there was some seasonality in it.

Well, at least according to the numbers, it was down almost $20 million. Okay.

But -- excuse me -- you have the lumber market comparison, which is probably more telling. The lumber prices were so much more higher and our selling prices were so much higher in Q2 than they were in Q3 that that is going to be the lion's share of it.

Okay, that makes some sense. And then you said you were disappointed in big-box. Is that -- presumably you did not lose market share, that it was really more of a problem with demand at the big-box themselves as opposed to any market share losses?

That's absolutely correct. Like I say, the sales of the big-box was off 10% to 15%. We made some good market share gains with them in the beginning of the year with all three boxes. So we were fairly confident of what was going to happen in that segment. But what happened in the quarter was sales started dropping really, really quickly for them and the boxes went into a cut inventory mode. So not only did they -- were their orders, instead of a truckload, were half a truckload; in many cases, they let themselves run out. And so the takeaway was terrible in the quarter.

Okay, great. That's great color. And then in a comment previously, you said you were hopeful for Q3 growth, which you attained Q3 over Q3 last year and you were also hopeful for Q4 growth year over year. Entering Q2, where are you now? Are you still hopeful? Or do you still believe you can obtain Q4 year-over-year growth?

We still feel very good about the industrial market and our ability to grow there. Because of the acquisition that we did on the manufactured housing side, we still expect to see good growth there. DIY is going to continue to be a challenge and then we had a couple of plant closures, like Mike had said, on the site-built side. So we are going to have our challenges in DIY and site-built, but hopefully they are offset by industrial and manufactured housing.

Great. Thank you very much.

David Leibowitz, Horizon Asset Management.

Good morning. Very briefly, given the closings that you refer to, how many facilities will we have at the end of the year and what will their total capacity be in terms of dollar revenue?

Are you referring to site-built facilities or --?

Companywide.

Companywide, we will have approximately 70 to 72 facilities open.

And what will your total capacity be at that point?

That is a hard one to give you an answer to. I can answer it in the sense that we can grow our sales dramatically without having to add another facility in Universal. A lot of our plants are running at 50% to 60% of capacity.

Are you at breakeven at 50% to 60%? Do you need 70% or 75% to be at breakeven for those facilities?

A lot of them are making money at 50% capacity. It is a mix issue for us, David. That is the thing that we have been talking about for years is even if things get tough in our treated side, we have so many other products that we put on the truck that help fill the sales mode and help cover some of the costs in the plant that it is a great model.

Okay. And is there anything new on the acquisition front you could tell us about in regard, not to names, but if in fact you have negotiations going on at the moment?

We are in negotiations with a company right now and that would be on the industrial segment. And we are diligently trying to continue our strategy in the manufactured housing side in a consolidation move. Those are the two areas that we are focusing on right now.

Okay. And the company you are in negotiations with, approximately what are their revenue?

Their revenues are in the neighborhood of $20 million and I really probably shouldn't say any more than that at this point.

Okay, I will not question further there. Just one last question, as we approach the new year, when will you feel confident enough to give us a five-year projection as the Company had been doing until about a year or two ago?

We have that on the docket to talk about in our November strategy meeting to look at whether we should continue Route 2012 or look at a new strategy. And so we should have an answer for you when we talk to you again next quarter.

Thank you very much.

Robert Kelly, Sidoti.

Good morning. How are you guys doing? I just have a question on DIY as it started to slow down throughout the quarter. I mean how much do you attribute the slowness to inventory reduction measures on their part or do you see that 10% to 15% decline you called out in the big-box channel reflective of the end market or end-user demand?

I think a big part of it is the end-user and when they saw that -- we saw this starting in Memorial Day where -- which is the big time for us that the sales didn't materialize and it just -- it never got going and we thought it would. I think what happened was, as the big boxes looked at it, they then got into a cut the inventories, don't add any new SKUs. If something is not selling, get it off the shelves and put something else in there. So it was a combination of both, but basically it was driven by lack of consumer sales.

So now with them kind of cutting back and feeling less optimistic about I guess the short term, are you still in inventory reduction mode or do you still have some more work to do there throughout the end of 2010?

We are in a great inventory position and what we would like to be able to do now is what we are really, really good at is when we see an opportunity in the market, and there is some out there today where pricing is at historic lows, we want to go in and buy, and even if we have to sit on it until March when we get some takeaway, we think it is the right thing to do and we think that it will enhance our margins. So don't be surprised at the end of the year if our inventories are a little higher because our inventories are right and we are now going to make the opportunistic buys that we need to enhance our margins.

Is it fair to say, Mike, that those opportunistic buys did not present themselves in the early part of 2010 with lumber spiking?

It was really tough this year, Bob. Every year, we have been able to go in and at some point in time make a buy and enhance our margins and two things happened. If it came about or when it came about, we really weren't in the mode to add inventory. We felt we had to get our inventories down and get the plants right before we went back in. And so it cost us a little bit if there was an opportunity there, but this is kind of the time of year where everybody slowed down and the mills are still producing and they have got to move some inventory. So we are feeling pretty good about it. We took some pain here in the third quarter, but we think long term it was the right decision.

Right. Now as far as the 72 facilities you have operating right now, are you at a point, assuming demand stabilizes, where you no longer have to make adjustments to your capacity?

I think the answer, Bob, is we always look at plants, like I said before. We may have a plant that right now is profitable, but if we think long term it makes sense for us to move it into another plant and make that plant even stronger, we will do that.

So there is still consolidation opportunities, not necessarily closure?

There could be. Yes, there could be.

Is there anyway to gauge a guess at what the cost savings -- I feel like back in '06, '07, you were north of 100, maybe north of 110 plants. What kind of cost savings do you get from going to 72 from that triple digit number?

I'm sorry, Bob. I just don't have that for you off the top of my head.

I mean is it safe to say that your fixed costs are down equal percent? The percentage change, 70 from 110 or whatever it was, are your fixed costs down that much as well?

Bob, you know what, I'll tell you what, I will take a look at that and maybe that is one we can talk about after the call.

Excellent. Thanks, guys.

Ladies and gentlemen, this concludes the allotted time for questions. I would now like to turn the call back to Mr. Mike Glenn for closing remarks.

Well, thanks, again, for your support and we are certainly disappointed in our numbers and never feel good about disappointing you. But trust me, we are well-managed and there are better days ahead. So thanks, again, for your time today. Have a good week.

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