UFP Industries Inc (UFPI) 2011 Q1 法說會逐字稿

Good morning and welcome to the Universal Forest Products first quarter 2011 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 21-E of the Securities Exchange Act, as amended and are based on management's beliefs, assumptions, current expectations, estimates and projections about the market we serve, the economy and the Company itself. Words like anticipates, believe, confident, estimate, expects, forecasts, likely, plans, projects, should, and variations of such words, and similar expressions identify such forward-looking statements. These statements do not guarantee future performance and involve certain risks and 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. Fluctuation in the price of lumber, adverse or unusual weather conditions, adverse conditions in the market we serve, government regulations, particularly involving environmental and safety regulations, and our ability to make successful business acquisitions. Some of these risks and uncertainties, as well as other risk factors, and additional information are included in the Company's report 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.

Thank you, and good morning everyone. I'm going to be brief with my introductory comments so we can get to the business review and then get on to the questions that I'm sure you have for us. As you know, with us there is no BS. We're going to tell it to you like it is, and today I'm here to talk about the tough facts of the disappointing quarter and also talk about our opportunities for success in the future.

The first quarter was more challenging than we had anticipated. First, we knew our comps were going to be tough through this year in manufactured housing and site-built because of the federal stimulus package last year boosted sales in the first quarter in those markets. That was no surprise to us. Second, last year the unprecedented run in the lumber market in the first quarter gave us some very healthy margins. This year the market was flat and we didn't have the same benefit.

Then, there was the weather. I hate talking about the weather because it sounds like an excuse and because we always face challenging weather conditions in the first quarter. It's a given that January and February are going to be brutal someplace in the Midwest, Northeast, or the Plains states. But this year, the weather affected us in markets where it's usually not an issue. We had plants close in Texas, Georgia, North Carolina, and elsewhere in the South, in addition to all those closed in areas where you'd expect. And not just for a day or two you but for five, 10 and up to 14 days. We lost more than 200 production days at nearly 40 factories and that's something very significant and something we did not plan for.

Finally, there's this issue. Unfortunately, in some cases, we simply didn't manage very well. We had instances of costs creeping up and degradation in margins in the quarter that shouldn't have happened. And for the most part, we know why it did. In an effort to grow our sales, some of our operations simply took bad business. Business priced at levels that were unacceptable. And that's on us. And it's been corrected.

Despite all of that, we have many reasons to hold our head high. We have people in operations who are bringing us new and good business and who are delivering the products and services that have been key to our success for decades. We are a strong company with a solid business model and balance sheet, and the best people in the industry. And we have great opportunities for success. Our industrial business grew over 14% in the first quarter.

We're doing some new and exciting things. For example, we're opening up a new 120,000 square foot plant in Salisbury, North Carolina to serve the area's large industrial market and expand our offerings to our DIY customers. This new facility will allow us to meet the needs for a large and closed manufacturing facility and will have the potential for $100 million in sales including $31 million we've already identified for new industrial business. We're also expanding our existing composite plant in Wisconsin, as we prepare to launch our new line of composites. We're much better -- we're a lot better and tougher than the challenges we face. And we have many avenues for growth and success. I'm very optimistic about our future and I look forward to reporting on a better performance in quarters ahead.

Now I'll turn it over to Michael for our financials.

Thanks, Mike. I'll start by reviewing our income statement. Overall sales were little changed from last year, down 1% due to a decline in unit sales. But we had a good deal of fluctuation within each of our markets. Sales to the DIY market decreased 9% due to a 6% decrease in unit sales combined with a 3% decrease in selling prices. Within this market our mix changed as well. Sales to our big box customers decreased 12% while sales to our other retailers increased 2%.

Our sales to the manufactured housing market decreased 4% which was comprised of a 15% decline in sales out of existing plants resulting from a decrease in industry production of homes, offset by an 11% increase due to acquisitions. Our sales to the site-built construction market decreased 11% primarily due to unit sales. Plants that were recently closed caused a 17% decline while existing plants increased unit sales by 5%. By comparison national housing starts decreased 10% for the period.

Finally, we're pleased to report our sales to the industrial market increased 14%. Our increase in unit sales was again due to adding many new customers and an overall increase in demand of existing customers.

Moving down the income statement, our first quarter gross margin decreased by 2.4 percentage points and our gross profit dollars decreased by 20%. Our decline in gross margin this quarter was due to several factors. Most notably gross margins on sales to the DIY market declined by 3.3 percentage points for the quarter, resulting primarily from an increase in material costs as a percentage of sales to this market. This was primarily due to the lumber market which was increasing during the first quarter of 2010 and as a result improved margins on products whose prices are indexed to the current lumber market.

In addition to the decline in sales to our DIY, site-built and manufactured housing markets adversely impacted our margins due to fixed manufacturing costs. And major winter storms in January and February impacted production in many parts of the country which caused us to lose many production days. As a result, unfavorable cost variances increased by $3.5 million this quarter. Finally, our transportation costs were up about 0.5 percentage point year-over-year. SG&A expenses decreased by $2 million for the quarter primarily due to decline in accrued bonus expense.

Moving on to our cash flow statement, our cash flow used in operations was $109 million this year compared to $78 million last year. Our operating cash flow in 2011 is comprised of a net loss of $3.7 million and $115 million increase in working capital since December. Offset by $9 million in non-cash expenses. Working capital increased primarily due to much higher inventory and lower accounts payable levels at the end of March due to earlier purchases of inventory in 2011. As we mentioned last quarter in preparation for the 2011 selling season, we changed our strategy to purchase inventory earlier at opportune times in order to avoid buying as much inventory during the peak of the season when lumber prices tend to rise.

Investing activities include capital expenditures of almost $6 million and we still expect to spend approximately $35 million for the year. Finally our seasonal working capital requirements were funded through our cash reserves and $72 million in borrowings under our revolving credit facility. We currently anticipate strong cash flows for the balance of the year as we move beyond our seasonal working capital requirements.

That's all I have in financials. Mike?

Okay, at this time we'll open it up for questions.

(Operator Instructions) Trey Grooms, Stephens.

Yes, this is actually BG Dickey sitting in for Trey this morning. Just had a question, first off, I think in the prepared comments you stated that 1Q was obviously negatively impacted by some pretty severe weather conditions, as you guys exited the winter months. And I assume that's beyond us at this point. So can you give us a sense of how demand is shaping up this spring relative to last year and what your expectations are for the remainder of the first half of the year, given the difficult comps in the year ago period, particularly in DIY and site-built?

I'll tell you what we're seeing in the site-built side is, as I talked to our operations on the Eastern part of the US, we have more business on the books today than we did a year ago at this time in site-built. And it's all a matter of weather breaking to be able to get in and start the projects. We had the weather with the winter and then the last couple weeks we've had a lot of rain come through there. But our guys are fairly optimistic on the strategy that they've started with multi-family and commercial. They've got a pretty good book of business there.

The DIY business, it certainly hasn't started out as good as it did last year. And our take on that, BG, is that that's all part of the excitement that was created in the first quarter of last year that certainly wasn't there. And spring is starting to break across the country and we are seeing the orders start to pick up and move out. And we are optimistic with our DIY business. And needless to say, our industrial business is through the roof and we're opening up new plants and creating opportunities and we're pretty excited about it. In short, we're cautiously optimistic about the second half of the year.

Okay. And then just real quick, did you quantify -- maybe I missed this in the prepared comments -- the margin impact in the first quarter related to the plants being temporarily shut down? Did you quantify that or can you?

Yes, it's really a combination of the plants being shut down and then just lower sales levels in general. Unfavorable costs for instance, were up $3.5 million year-over-year. And BG, if I can just add a little color on that when he talks about unfavorable variances. When we run our plants, we can put the burdens, if we run 5 days a week, on all the wood that goes out. But if we only run 2 days a week, we've got all those burdens, all those fixed costs that we have to put to the products that we ship out that it adversely affects our margins. So that's part of what Mike's talking about.

Sure, I understand, thanks. And then just lastly, in site-built, can you talk a bit about your strategy moving more into the multi-family commercial government area and the momentum that you're seeing there? Because it sounds like 1Q showed some promise given prepared comments around the multi-family starts being up, I think you said 60% year-to-date as of February. But then sales were down double digits. So how can I think about this segment going forward?

Understand that in the first quarter that it was very difficult. We couldn't get anything in the ground. And our multi-family and military business is pretty solid. And I go back to what I said earlier in that we've got more booked right now and we're quoting a lot right now than we did a year ago at this time. I don't mean to imply that we're going through the roof and things are good again. They're great again in the site-built side but it is better than it was last year at this time, at least for the business that we're attacking. The production builders, it's still a struggle.

Okay, that was helpful. I'll pass it on, thank you.

Robert Kelly, Sidoti.

A question on the weather impact. Did the sales get cancelled or did they get moved back into April and did they hit you in Q2?

Yes, that's a million dollar question. Right now, we haven't seen, I think they're getting pushed back.

Okay. As far as the margin pressure you felt due to material costs, particularly in DIY, I remember during the most recent quarterly call you talked about being able to get some advantageously priced lumber. Did that not help you at all in 1Q? Will that be a benefit in 2Q or did we already use up that benefit?

It helped us. We just didn't have the volume in the first quarter to get what we wanted. But, yes, it helped us. And I think we are probably right on market right now, maybe a little under. The market has dropped about, since the beginning of the year, probably $25 or $30 a 1,000 board feet so we're still on market.

Okay, great. And then just as far as how the comps play out from here on out for 2011, you've tough volume comps from 2Q '11, a big sales quarter last year with the housing tax credit, and hope that the economy was improving. But your margins were pressured in the back half of that quarter due to the fall off in lumber. How do we think about the top line and the margin line for the next couple quarters on a year-over-year basis given that lumber's looking fairly stable compared to on the last couple months run rate?

Yes, those are good points. With respect to the lumber market, the lumber market is pretty stable and it's going to be at a level that's lower than it was in Q2 last year. So that's going to pull down the sales dollars. From a unit standpoint, yes, site-built in manufactured housing without the tax credits is going to be tougher and it's going to be more pressure for a decline there, similar to what we had in Q1.

Offsetting it, though, is potentially industrial. We had another real strong unit sales growth in industrial and it offset much of the decline in manufactured housing and in site-built. If we get demand to pick up in DIY and to see a rebound in Q2, that would certainly be helpful in helping us hold our own. But where we really have an opportunity to potentially grow sales is really during the back half of the year. Housing was pretty soft and our existing, we will have lapped kind of the annual time period for when we closed the plants last year, we had exited California in the site-built side last year and that will give us an opportunity to perhaps grow site-built in the back half of the year. And manufactured housing was very soft in the back half of the year last year, too, so we have an opportunity there.

With respect to margin, within the next quarter, the factors would be, last year in April you had a market that was really running up. And similar to February and March of '10, where margins were boosted by that market running up, we had the same effect in April last year and a little bit in May. But, conversely, we had a real tough June when the market fell off the table. So April is a tough comp for us, very tough, and but June is the first month where we will have a much easier comp. And then certainly the back half of the year we have an easier comp, as well.

Okay, great. And then just finally, actually just two last ones. Just given all that you said there, would margins you think they improve on a sequential basis once you add back the lost days from 1Q? And then it looks like you dipped into the revolver pretty heavily during 1Q. Does that all get paid off by the end of June or by the end of 2011?

Yes, I would expect that some time, probably not by the end of Q2 but some time in Q3 we would be off the revolver and we would start building up that surplus of cash again. Inventory levels were built up pretty strong. And as Mike had said, the cost side, our costs in inventory look pretty favorable relative to the market. From this point forward it's whatever the market does and what that impact has on our sale prices.

Keith Johnson, Morgan Keegan.

Just a couple questions. On the fuel side, I missed in the opening remarks the percentage that the transportation costs had increased in the first quarter. Was that a year-over-year?

Yes, it was about a 0.5 point year-over-year.

Okay. And then with diesel prices continuing to move up, coming into the second quarter, are you guys looking at surcharges or are there ways to recoup that if the diesel market continues to show strength through the second quarter?

And we anticipate that we will see a continued rise in diesel fuel. We have put fuel surcharges into effect late in the quarter. We had some accounts where we fight a little bit of that and stuff where we have fixed pricing. It's a little bit of a battle to get it but on a whole, we are. We started early, we anticipated it and most of our customers are in a fuel surcharge at this time.

Okay. On the new facility you mentioned, I think 120,000 square feet, is that operating going into the second quarter? Or what's the timing there? And then how do you guys envision the ramp up in revenue potential?

Yes, it won't be in the second quarter. It will start up in probably the third quarter, late in the third. And we already have a fair amount of business that is set for that factory and so we need to get in it sooner, not later.

Okay. And what was the revenue potential you guys mentioned in the opening remarks for that facility?

The potential that we've looked at is somewhere around $100 million. We've identified and had business that we think we'll get in there within the next 24 months of about $30 million.

Is there a way that, you mentioned that you did have some benefit last year in the first quarter that was created by the way lumber prices moved. Is there a way you can quantify that, what type of impact that was on a year-over-year basis?

It's a hard one to do, Keith. I can tell you based on, I'll give you an example. Last year, we did the same type of buying strategy where we bought early in the year below even existing markets, and then the market ran. So at this time last year, we were selling some products that had over $100 a 1,000 board feet profit in it just from a market run, that today, it's flat.

I'd also throw in there that I had mentioned what the decline in margin was in DIY. Of that decline in margin, 300 basis points was due to material costs percent of sales. And on $150 million of sales to the DIY market, that's $4.5 million. Now, there's other things incorporated in that, too, but much of that would have been because the market, the difference in what the markets were doing year-over-year. Last year running, this year stable and flat.

Okay. And just to revisit one of the responses to trends, as you came through March and April and the markets where the weather opened up, did the DIY market respond any better? It's just a point of clarification from your comments.

The DIY market opened up but it didn't open up with the same robust it has in years past. And really what we're trying to figure out is, as we historically look at it, it used to be -- and I'm going back a few years -- it used to be the DIY market would really take off about two weeks before Memorial Day. And then explode all the way through the 4th of July. And then the last few years it just started a little earlier. So I think we're settling into a more traditional type of market and we anticipate that the big boom will probably come in the middle of May.

And then just last final question. What's your depreciation target and amortization target for the year?

$35 million total in that neighborhood.

David Leibowitz, Horizon Asset Management.

I apologize if these few questions were asked. I was disconnected from your call because they neglected to get the firm I was with, so they had to take me off of queue to do that. I apologize. First, as we look at the year for the next three quarters, are you going to be cash flow positive for the full year?

Yes, absolutely. We're at our peak in terms of working capital usage, our working capital since the end of the year is up $109 million. That's all going to come back to us over the next nine months.

And that said, are you going to use some of this to pay down your debt any further?

What I would expect is that at the end of the year, we'll build up a cash surplus that's probably similar to what it was last year, and that will leave us with nothing on the revolver and still $53 million in long term debt, most of which matures in December of '12.

Okay. The conversation this morning did not touch on potential acquisitions. Is there anything you can update us on in that regard?

David, I'm going out in two weeks to look at another company. It's just the values are very difficult to try to get something done in today's market. Everybody's still trying to be priced at what their company was worth four years ago, and we're just not going to overpay just to jump start. That's why we opened up the new plant in North Carolina, because we can open it up and take some startup costs and still be better off in the long run. We continue every quarter to get potential acquisitions. We go look at them. We talk to them, and the valuations just don't turn out. We're working on it, trust me.

There's not a question about that. What about bankruptcy court? Has there been anybody who has gone into bankruptcy court where you can then go in and take over whatever outstanding liabilities are there and own a business?

Historically, when we've done our acquisitions, we've tried to make sure that the acquisitions are accretive. We don't want to go in, especially now, go in and buy something that is going to negatively impact our earnings. So I don't know if we would be a player in a bankruptcy acquisition.

And we still expect the housing market, where most of those opportunities would exist, is still going to be tough for a couple years out.

And lastly, in the DIY business, what percentage of the regions of both Home Depot and Lowe's do you sell into? And what, if anything, are you doing with Menards where they overlap with those two companies?

I'm not sure I understand what you just asked me, David. I'll try to answer what I think you asked and you can stop me if I'm rambling. We sell to Home Depot in over 1,400 stores. Where we have treated plants, we sell to Home Depot. Typically in the markets where we have those plants, we have somewhere between 40% and 60% of the treated volume in those markets. We don't compete with Lowe's in that. In other words, we do sell Lowe's but we don't sell them treated lumber. We have a variety of other products that we sell them. It's a tight rope that you walk when you sell both.

And Menards is another great company and an interesting twist. But they're very different than the other 2 companies in that they are very vertically integrated. They own their own treating plants. They own their own manufacturing plants. So a lot of what we do for our other customers, Menards tries to do for them self. But we do sell them. We do supplement some of what they can't get done, and we continue to try to grow our sales with them. I don't know if that answered your question.

The only other -- what I was trying to get at, how much of the market that DIY covers do you not sell into at the moment via Home Depot? In other words you said you have 1,400 stores. They look at their stores on a regional basis. And how many of the regions as they [encount] them do you, in fact, serve?

I don't know. 40%?

Okay. Thank you very much.

Steven Chercover, DA Davidson.

Good morning, everyone. Many of my questions have been answered. But it's good to see that you're on a bit of a growth trajectory with the new facility. Are you able to transfer any of your assets from other facilities that were underutilized to bring that on in a rather inexpensive fashion?

Yes. That is part of our plan. A big part of moving into this new facility is the one plant that presently has some business, we've pretty much got it maxed out. We don't have enough inside storage to take care of some of this business that we're doing, this industrial business, which is pretty unique. And so we are able to take some assets from some of our other factories and move it in there. We do need to buy some highly specialized equipment to take care of some of the business we picked up. But the other part of it is, the facility that we bought is probably within 5 miles of one of our facilities. So we won't have to bring in a lot of high level management to take care of it because they will be able to handle that plant and the existing plant.

Okay. And then within your existing footprint, is that still scaled or the right size to achieve your objective of $3 billion in sales? Or perhaps, alternatively, are there any facilities that are redundant at this stage? Or do you think you've gone through that exercise?

We have enough capacity right now to achieve the $3 billion in sales. We are looking at, we always look at facilities, and to see if we have to close them and combine them into other ones. We don't have much of that, Steve. There may be one that's sitting out there right now that we're taking a look at.

But there's not a lot of risk, then, to your goodwill numbers or anything like that?

No, we just went through that process at year end, Steve.

Okay. And then with respect to that $3 billion objective, which you referred to as Route 212, I think you took an exit ramp from that route back in February. And yet it still showed up in a presentation that you did in March. Was that just an oversight or --

We haven't done a presentation yet this year, Steve. But, you're right. We took our 2012 goals and we pushed them back two years. One of the major assumptions within the goals was market recovery. And that was going to drive at least half of our sales growth. And markets fell backwards instead of growing. So hopefully we put together a good plan and we have our goals going forward.

There is actually a slide presentation that's dated March 23, so perhaps that was an oversight of some sort. But that's helpful. Thanks, good luck this year.

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

Again, thanks for spending some time with us this morning and hearing our message. I want you to know, we were disappointed, but rest assured, we've got our nose to the grindstone and we will do better. Thank you.

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