UFP Industries Inc (UFPI) 2010 Q4 法說會逐字稿

Great day, ladies and gentlemen, and welcome to the fourth quarter 2010 Universal Forest Products Inc. 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 facilitate a question-and-answer session towards the end of the 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 Communication. Please proceed.

Good morning and welcome to Universal Forest Products' fourth 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 anticipate, believe, confident, estimate, expect, forecast, likely, plans, project, 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 uncertainty. 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 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 express written consent of Universal is strictly prohibited. At this time, I would like to turn the call over to Mike Glenn.

Good morning everyone, and thanks for joining us this morning. I'm kind of glad to be talking today about Universal's performance in a tough year and to end the conversation about 2010, and start an optimistic conversation about 2011, because we like where we stand, and we are excited about our business and our opportunities moving forward.

Like I said, 2010 was a tough year. Government incentives and programs fueled false hope and unsustainable business that gave way to some really tough realities. The lumber market was as volatile as we have ever experienced, foreclosures continue to devastate the housing market, high unemployment hampered spending and fed insecurity about the economy and future. As you all know, it was tough.

But despite it all, we told you we would grow our sales, and we did, by almost 13%. We're disappointed in our earnings, but we don't think we will see a repeat of many of the issues that negatively impacted them. Our challenges in 2010 were balanced by some very hard-won successes. Manufactured housing limped along at 50,000 starts, but we enhanced our performance by expanding our distribution business, and by offering more to our customers. In our site-built segment, we closed four operations last year, and exited the state of California, but we gained share in other markets, and continued to seek out sustainable, profitable business.

Our focus in DIY to grow our opportunities with independent retailers is starting to pay off, and we grew our business with these retailers significantly in 2010. Industrial was and remains a great strength for us. We netted more than 250 new customers in the year, and saw healthy growth with existing customers and we see nothing but opportunity looking ahead. So yes, 2010 was tough. But we worked hard. We worked really hard and we had some successes and now we're focused on growing our sales and profitability in 2011. And we do what we say we are going to do. At this point I will turn it over to Mike Cole for a business review and then we will open it up for questions.

Thanks Mike. I will start by reviewing our income statement. Our sales for the quarter increased 12%, driven by slightly higher selling prices due to the lumber market, and unit sales that were 8% higher. By market, our sales to the DIY market increased 5% due to a 4% increase in unit sales, combined with a 1% increase in selling prices. Within this market, our mix changed as well. Sales for our big box customers were flat, while sales to other retailers increased 17% due to market share gains.

Our sales to the manufactured housing market increased 2%, consisting of a 6% increase due to higher year-over-year lumber prices offset by a 4% decrease in unit sales. Unit sales were favorably impacted by acquisitions we completed earlier this year, which contributed $5.5 million to our sales this quarter. Excluding the positive impact of acquisitions, our unit sales were down 15%, reflecting a decline in industry volume.

Our sales to the site-built construction market increased 16%, comprised of an 8% increase due to higher year-over-year lumber prices, and an 8% increase in unit sales in spite of lost volume from plants we closed earlier in the year. Unit sales increased in large part due to increased revenue from framing services in certain regions, and an increase in sales of lumber and plywood associated with turnkey projects. Finally, our sales to the industrial market increased 21%, due to an 18% increase in unit sales and a 3% increase in prices. Our increase in unit sales was in large part due to adding many new customers, and an overall increase in demand from existing customers.

Moving down the income statement, our fourth-quarter gross margin decreased by 1.1 percentage points, and our gross profit dollars increased by only 2%, despite an increase in unit sales of 8%. The decline in margin was primarily due to our site-built and DIY markets. Margins declined on sales to the site-built market, primarily due to a change in our sales mix to include more framing, lumber, and plywood sales and low margin on business at plants we closed during the quarter. Margins declined on sales to the DIY market, primarily due to certain product lines whose prices are fixed for the year, while the related cost of material increased during the year.

SG&A expenses increased by $3.2 million, or 7.1% for the quarter. The increase in SG&A was primarily comprised of an $800,000 increase in employee benefit costs, $1.3 million increase due to variable selling costs, and an insurance settlement gain that was recorded in Q4 of '09 for about $800,000. I am pleased to note that salaries and wages remained flat for the quarter, in spite of an 8% increase in unit sales. Finally, we recorded a $3.6 million tax benefit in the quarter, which includes an adjustment to remove a $2.4 million valuation allowance against the deferred tax asset of a subsidiary. Without this adjustment, the income tax benefit for the quarter would have been $1.2 million.

Moving on to our cash flow statement, our cash flow from operations was $29 million this year, comprised of $17 million in earnings and almost $41 million in non-cash expenses, offset by a $29 million increase in working capital since December of 2009. The increase in working capital is primarily due to the impact of higher sales and accounts receivable and an increase in our inventories as we changed the timing of our purchases to buy earlier at opportune times in order to protect margins on 2011 business. As a result, our cash cycle increased about three days for the quarter, primarily due to an increase in our days supply of inventory.

Investing activities include capital expenditures of almost $27 million for the year. In addition, acquisitions primarily consist of $6.5 million spent to purchase the assets of Shepherd and Service Distribution earlier this year, and $4.6 million spent in July to acquire technology we plan to use to produce new products. Finally, financing activities for the year consisted primarily of dividends and share repurchases. With respect to our balance sheet, our cash reserves were $43 million, and our debt was only $55 million at the end of December. Cash reserves were a bit lower than previously expected, due to the change in our inventory buying strategy. That's all I have on the financials, Mike.

Okay. At this time, we will open it up to questions.

(Operator Instructions).

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

Yes, good morning, guys.

Good morning, Trey.

This is actually B.G. Dickey sitting in for Trey this morning. I just had a quick question here on something you had in your prepared comments and the press release. You talked about a plan for new opportunities for growth in 2011. I just wanted to know if you guys could provide some color there, if you're talking M&A, and then maybe which segments are we talking about there?

B.G., we have got a couple of things that we're working on. The first one is, we have been working quietly on our export business, and last year we grew it by about 50%, and that was primarily in the islands. We are looking at expanding that business, and at this point we're working on a business plan for Europe, South America, and Asia, and we should know something by early third quarter of this year of how deep and how far we want to go with our export.

The second part is, we touched on it briefly in one of the conference calls earlier, but we have a new technology that we bought last year, an oriented strand polymer product. There is nothing like it in industry. And the technology would be able to be used in all the business segments that we are in. We will probably start out with a launch in the retail side of it with a fencing type of product, and, in fact, I just got back from a meeting in Las Vegas with about seven of the biggest fence companies in America, and they gave us a very strong, positive review on the product as we showed it to them, and got their input of how they would like to see us bring it to market. So those are a couple of big ones.

The other one is, our independent lumber business that we went after, started about 18 months ago, is going much better than we anticipated. We are gaining significant ground in that, and really our challenge is to continue that, but also to get in a little deeper with them. And by that I mean we may be selling them treated lumber right now, but there are a lot of other products, as you know, that we sell that we want to bring to that segment, and we are working on a plan to get deeper into the independent and help them grow their sales. We are very optimistic about 2011 and our sales growth.

Okay, great. That was great color. And then just taking that and segueing into the cost side of the business with that, it looked like in the quarter the SG&A was up a little bit more than what we had forecasted, just given your normal patterns there. I know that you called out a few things a minute ago. I think you said you had some higher employee benefit costs and higher variable cost there. Should we expect that, given what you just said about the incremental spend that you're going to put forth behind some of these new initiatives in 2011, should we maybe expect to see a little bit higher SG&A costs next year?

A little bit higher, though, than what we experienced in 2010, but we still remain pretty committed on making sure that line stays as fixed as it possibly can.

Great, thanks. I will pass it along.

Thanks, B.G.

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

Good morning, guys.

Good morning, Robert.

Good morning.

You mentioned, towards the end of your cash flow statement comments, inventory buying strategy. Were you able to get some lower-cost raw material as the year ended up or at least with respect to the current prices?

Yes, let me give you a little longer answer to that question than probably you are anticipating, but our inventory at the end of the year was up about $34 million over a year ago, and a big part of that was some opportune buying that we experienced earlier in the year. One of the problems we ran into last year was we never had an opportunity to make any buys throughout the year. It was kind of a funny year where the market, as we talked about, spiked early on, and there never became an opportunity to make some buys. So, this year we looked at our business and looked at what business we were going to have and actually started buying much earlier than we have in the past. And so the $34 million increase really is product that we bought that was significantly below the current market.

Are those opportunities to buy below the market still available to you?

No. Not right now. The market continues to be an interesting play. Bob, the Chinese are having a really major impact in the lumber market right now. We never know when they are going to come in. But when they do make a decision, that market moves pretty rapidly, and you would think at this point that the market would be coming down a little bit because, obviously, this has been a very harsh winter, and there hasn't been a lot moving forward. So we kind of thought maybe we would get some buying opportunities, but this week the market took off, and it is running again. So, the good part for us is we don't have to participate right now. We can sit back and we have got the inventory that we need to take care of what we have. We know the opportunity will present itself at some point, but if it doesn't, we are okay with that too.

Understood. On the gross margin comments, you talked about some of the pressures within site-built and DIY, negative mix and drag from the plants that you closed. Is there any way to isolate that and any way to tell us if there's going to be any impact beyond 4Q?

The two things that really impacted our margins in the fourth quarter were we closed four site-built plants in the fourth quarter, and so through that closure we obviously had some margin issues with the business that we had in terms of closing it up and inefficiencies, and so that really negatively impacted our site-built business.

Our industrial and our manufactured housing business was really, from a margin standpoint, pretty flat in the fourth quarter, and our DIY business was impacted by, a little bit what we talked about earlier, where we never got -- we had selling prices drop at the beginning of the year, which we knew, but we were never able to go in and buy into that drop in price to enhance our margin, so that impacted us in the fourth quarter, late in the third, and into the fourth quarter.

So we've touched on how we have corrected that going forward. The first one was we bought earlier, we knew what we wanted to buy at, we knew what our sale prices were, so we've taken care of that. And the second part was we were much more aggressive with our partners this year in terms of when our contract pricing was down, we shared it with our mills, we told them where we were at, and we really needed for them to come down this year. And so any decrease that we saw in our selling prices and erosion in margins we were able to offset by a decrease in purchase price. So, we were very pleased with what our buying department was able to do this year to help us keep our margins. And, like I said, the other part was we increased our inventory about $34 million.

The last part of your question, is there anything going forward? I think there's two things that we're a little bit worried about but aware of, and the first one is freight. That could be a problem again. But we had this discussion a couple of years ago, so we're much more prepared for it this year. We've already been talking with our customers and setting some targets out there. When the fuel gets to "X" price, we're going to have to ask for some help. So, we are being much more proactive on it.

And, really, the other headwind that we are facing right now, this has been a brutal winter. And I hate to use that and talk about it because we are not a company for excuses. But, shoot, last week we had -- at one point last week we had about 20 factories that weren't even able to open. And in the state of Texas, we had one plant that did not open for the whole week. This is just unheard of, and it seems like we have fought this battle in January every week, and now in early February we are fighting a little bit of a harsh winter. But other than that, we know that will pass through, but the real business, we are really excited about. We are really positioned right, and we have got some good business and some good growth plans.

Right. So, just touching on the growth plans, especially the export opportunity that you spoke about, can you just tell us a little more about where you would be shipping from? Is that the most recent acquisitions you have done over the past three or four years, and what type of product would you be selling?

The export would really fall into a couple of areas. The first one is, like I mentioned, we have been shipping into the islands, meaning Haiti, Dominican Republic, and most of those Caribbean islands, and that business grew by 50% last year. We are making great progress in there, but as we looked at that model, we thought we need to look at Europe and South America and Asia, what we are going to sell over there. It can go anywhere from our decorator and post-cap line to composite decking. We have got about five or 10 containers we are shipping over to Korea in the next 60 days. But it really got us to thinking about what else can we do, and so we are in the midst of a study right now of what products and how we should go about this.

Right. Does it involve green-fielding or acquiring more distribution points, or would it be from where we are today with the current manufacturing and distribution footprint?

Right now, we believe it would be with the existing footprint that we have.

The next question comes from the line of Steven Chercover, representing D.A. Davidson. Please proceed.

Good morning, everyone.

Good morning, Steve.

First of all, I might have missed it, I don't think you specified which markets you exited in site-built, and so if you could enumerate those. And does that impact your other businesses, because usually your facilities, I thought, did multiple lines of business.

That is a good question. We closed two factories in the state of California, and basically, we are no longer in the site-built business in California. Those plants were not integrated with our other plants. They were stand-alone, site-built plants. The shame of it all, Steve, is the one plant that we closed in Southern California at one point was the biggest truss plant in the world. We were doing somewhere between $1.3 million and $1.7 million a week in just trusses and floor systems. And it got down to the point that we were doing about $250,000 a week. And, so, as we looked at California, we don't see it coming back for a while. So we shuttered it, and that was a nice plant for us.

The other two that we closed were in the state of Texas. One was north, up in the Dallas-Fort Worth area, and the other one was in Houston. Those, again, were stand-alone operations, and we were able to close them without impacting any of our other business. We still have a plant in San Antonio, and were able to reach a little further with that, but that is an operation that has been profitable through this downturn.

Will you sell the facilities, or will you just hold onto them for the eventual recovery?

In the case of California, we will sell it. We don't think we are going to come back and play in California. In all due respect to California, it is a very difficult business climate there in a very litigious state, and we have just decided that we're not going to participate. The risk-reward just is not worth it for us. And in Texas, we will mothball those plants and if the opportunity arises for us to come back in and open them up and be in business, we will. If the opportunity arises that we could sell the facilities and make a profit on that, we will do that.

Got it. Okay. Don't misinterpret this, you guys still have a great balance sheet, but I was under the impression that you would end the quarter debt-free. So, was it just laying in those inventories that caused you not to be debt-free?

Yes, that entirely. I think we closed the quarter with $43 million in cash with $5 million in debt, and that was a bit lower than what we expected too. But inventories were up $30 million, so that's the big driver. And then sales for the quarter were actually pretty good, all things considered, and that drove up the receivables levels, too.

Exactly, yes. I am not sweating it, don't worry. And final one, share price was pretty strong in Q4. So, did stock-based compensation help drive the SG&A expense in the quarter?

Yes, Actually, that was -- I did not mention it because it wasn't one of the biggest items, but that was up about $500,000 for the quarter.

Sorry, how much?

That was up about $500,000 for the quarter.

Okay. So it's not that much. Okay. Best wishes for 2011. Thank you.

Thank you, Steven.

Thank you.

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

Good morning.

Good morning, David.

Hi, David.

A few unrelated items. One, you mentioned the opportunistic buy of inventory. How much of your dollar amount on the books at the end of December is this below-price inventory, and what sort of profits are we looking at when it is, in fact, sold?

I can't answer the second question, David, because I don't know what the lumber market might be at the time at which we sell. But on the first question, let me give you some color, just in the aggregate. We are able to track our overall lumber costs with all the species we buy blended, and when I compare December of 2009 with December of 2010, our cost of lumber was up about 2%. The market, when I look at random lengths overall, composite price, was up about 10%, so we feel pretty good about our inventory situation relative to the market.

Second question, the export sales, and you mentioned looking at Asia, et cetera, will your margins in export be comparable to your margins overall, or is this going to be a low-margin business just to move inventory and to take an easy profit?

Well, if there's an easy profit to take, we'd sure like to do it. We haven't found those in a while. No, David, we're not going to go into it for practice. The business that we have done in the islands has been a profitable business for us, and as we look out to these other areas -- and that's why I said, we'll know more come the end of the second or third quarter, whether it's a business we want to get really deep in or just be an opportunistic seller. So, if we can't thrive in it and have a sustainable business, then we're not going to play.

And last question. If one looks back to your heady days, 2005, 2006, how much would you need to increase your prices to get your operating margins and pre-tax margins back to those levels?

David, what drove that wasn't necessarily a lot on pricing but was driven a lot by volume. And as we can run those plants two shifts, our cost per truss, per floor system, per whatever the product is, goes down dramatically, and that's what's really impacted. It isn't so much -- certainly we've had lower -- we've had downward pressure on pricing, but the fact that we can't run the volume through those plants has had the biggest impact.

And finally then, in looking at your four key businesses, do you expect to see in 2011 and then into 2012 any great variation as to their percentage contribution to the total?

We think that our manufactured housing is going to be relatively flat. We think our site-built business, again, will be flat to down a little bit, because of the four plants that we closed, but we will take and have been taking market share. Our DIY retail business, it's going to be up a little bit, nothing to get real excited about, and our industrial business will be up dramatically.

Thank you very much.

Thank you.

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

Good morning, guys.

Good morning, Keith.

Good morning, Keith.

Just a couple of quick questions, maybe just housekeeping questions real quick. As we look into 2011, maybe how we should think about the tax rate, and then maybe if you could give us an idea from a CapEx standpoint what you guys are targeting?

Sure. Tax rate, 37%, 38%.

Okay.

And capital expenditures, about $36 million. And you did not ask depreciation and amortization, but I figured you'd want it.

Yes.

Depreciation $30 million to $31 million, amortization about $5 million to $6 million.

Okay. All right. Great. That is helpful. Could you give us maybe a little color on the selling trends during the fourth quarter? Were you guys benefited any by weather patterns or the construction season extending a little longer in some of the markets? I was really thinking maybe along the lines of site-built, some of those type of markets.

Yes, actually our fourth-quarter sales were a little bit better than anticipated. The downward pressure on pricing really wasn't a fourth-quarter issue. It was more of a contractual issue, and our inability to go in and enhance our margins in the fourth quarter. But we did not feel any pressure in the quarter.

Okay. And then from just --

Within the quarter, Keith, I would probably just add to that, the year-over-year comparisons got better and better as the quarter went on, so December sales were higher percentage-wise, had more growth in December, for example, than we did in October.

Okay. And then when I look at the DIY market, and I just kind of look at the volume trend as you came through the year, and I guess maybe this is what you were referring to with year-over-year comps getting better in the fourth quarter, but you had a, I guess, a positive volume comp in DIY, the first time that that's occurred, during 2010. Are we beginning to see maybe some of that market come back, plus the share gains you guys have gotten on the independent side, or was it purely just the independent? I didn't know if there was a little bit more color you could add there.

No, I think you said it correctly. I think the DIY business came back a little bit, and then the growth that we had within the segment also helped our sales.

And how should we think about that growth potential on the independent side as we look into 2011. Is there a way to frame that? I guess there is a tremendous amount of pro lumber dealers out there that you guys could get out and get in front of, or how should we think about that?

We just got started with that this year, and we grew our sales to them for the year about 19%. And that is just getting started. So, we're optimistic, and I think that amounts to about $30 million, $35 million in growth. So, we're pretty optimistic about our ability to grow that in 2011 and beyond.

Okay. And just last question real quick. I may have missed it. What was the drag on the site-built from the closed operations on a year-over-year basis? Or how do you think that was?

On the sales side?

Yes, on the sales side.

Yes, I have that. Closed plants reduced our sales by about $9 million for the quarter.

Okay.

About $27 million for the year.

Okay. All right, great. Thanks. Best of luck.

Thanks, Keith.

Thanks, Keith.

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

Yes, I'd like to thank you all again for your interest and support in Universal. Last year at this time, I think I told you that you could write it down, we would grow our sales. We did. We grew it by, like I said, almost 13%. I will tell you that again, you can write it down. We're going to grow our sales again this year. We're going to improve our earnings this year. We were disappointed in that, but you can write it down. Those two will both improve in 2011.

We brought all our sales managers in last week in the middle of a snowstorm that had 15 inches of snow here in Grand Rapids, but they came in. We had a great two-day summit with them. We got them focused on really value selling of what we wanted to accomplish as a Company. We are very excited about it. We thank you for your support, and now we need to go back to work to live up to what we told you. Thank you again.

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