UFP Industries Inc (UFPI) 2011 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the third quarter 2011 Universal Forest Products Incorporated earnings conference call. My name is Chanelle and I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to Ms Lynn Afendoulis. Please proceed.

Good morning and welcome to the third quarter 2011 conference call of Universal Forest Products. On the call today our Chief Executive Officer, Matt Missad and Chief Financial Officer, Mike 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, estimates, expects, forecasts, 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 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 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 express written consent of Universal, is strictly prohibited. At this time, I would like to turn the call over to Matt Missad.

Thank you Lynn. Good morning everyone, thank you for joining us this morning. I would like to take care of some old business first. During our July conference call our former CEO, in his haste to retire, hung up the phone before I could publicly thank him. So, what I would like to do first of all is just give a special thank you to Mike Glenn for his 37 years of service to the Company and to wish him the very best in his retirement.

Now, I've spent my first few months as CEO on the road. I've been visiting our plants, meeting and learning from our employees, our customers, our vendors and our shareholders at getting to know our business better, introducing my expectations and learning what they hope and expect from me and the leadership team. These visits have reinforced my deep appreciation for the strength and spirit of our people. They are hard-working, entrepreneurial and are hungry for new growth. And, we plan to feed that hunger. Now, I would describe our recently completed third quarter as improved, but not yet satisfactory. Our team has done a great job focusing on cost reductions and improving efficiencies. They have also done a good job managing in a tough economy. However, we still have many areas to improve. In order to touch on some of those areas, I would like to briefly run through a few performance drivers that I watch, and since I like to keep things simple, kind of like a two piece puzzle I prefer simple focal points.

The first is sales. One of our major initiatives is to grow sales. We want to grow profitably. We know that the economy is not likely to help us in the near-term, so we need to add customers, markets and new products as well. The manufactured housing market benefited somewhat from some new FEMA orders which likely will be complete by November. We also continue to grow our distribution business and continue to refine our product mix. Now, the construction markets still face challenges of overcapacity and weak demand, so we have our work cut out for us there. Our challenge is to sell profitably. We're working hard to create opportunity especially in the multifamily and light commercial construction markets. We've done a good job of increasing our multifamily business, including turnkey work for one of our nation's largest apartment developers. Don't get me wrong, the construction markets will still remain very challenging places for profitable business, but we are tackling them from every angle that we can.

Now, we are going to continue to put energy, efforts and resources into developing new products to grow sales in all of our markets. From solar lit post caps to animal bedding, to balusters, and a new framing system designed to better withstand earthquakes and hurricanes, we are ramping up our efforts to continually innovate to create demand in the marketplace and sales for Universal Forest Products. This, I believe, is critical to our growth and success.

My next focus is on margins. Gross margins for the quarter increased slightly versus a year ago but year-to-date we are still well behind last year. Gross margins have been impacted by the declining lumber market during the busy selling season in the second quarter, as well as competitive pressures due to overcapacity in the marketplace. While we continue to explore alternatives, we do not see an imminent solution for the overcapacity challenge. So we will continue to face pricing pressure.

The third area I look at is inventory. Inventory is up approximately $8 million versus a year ago and is higher than I believe it should be. We will be focusing on managing our inventories down until our seasonal buildup begins. A number of our regions saw improvement in this area in the third quarter, and it remains a focus for each operation in every region throughout our Company.

And the final area I look at is accounts receivable. Our accounts receivable have improved $7 million from a year ago, and we will be keeping a cautious eye on credit throughout the next couple of quarters. We believe this will be a very difficult economic period for many in our industry and would not be surprised if additional companies are forced to close their doors.

Now, I'd like to turn it over to Mike Cole, our Chief Financial Officer for a review of our financials.

Thanks, Matt. I will start by reviewing our income statement. Our sales for the quarter decreased 2% driven by a decline in selling prices as unit sales were flat. By market, sales to the retail market decreased 5%, due to a 3% decrease in selling prices combined with a 2% decrease in unit sales. Within this market, sales to our big box customers declined almost 12%, due to consumer demand while our sales to other retailers increased almost 7%. As you might recall one of our objectives is to increase our business with independent retailers. Our sales to the manufactured housing market increased 2% due to a 3% increase in unit sales offset by a 1% decrease in prices.

The increase in unit sales was primarily due to our distribution business which increased sales by 58% this quarter due to new products lines we've added and share gains in existing product lines. Sales out of our manufacturing plants decreased 4% this quarter, which was in line with the declining production of HUD Code homes. Our sales to the residential construction market decreased 17% due to plants that were closed in Texas and California since last year. By comparison, housing starts increased 5% for the quarter.

Sales for the commercial construction and concrete forming market increased 12% as we continue to grow our sales to concrete forming customers. And finally our sales to the industrial market increased 6% due to an increase in unit sales while pricing remained flat. We exclude our Mexican partnership which is facing challenges with US exchange rates. Our industrial unit sales grew 10% and we added almost 150 new customers this quarter.

Moving down the income statement our third quarter gross profit as a percentage of sales increased by 30 basis points. Breaking that down, material costs as a percentage of sales decreased 120 basis points, as the cost of commodity lumber and inventory for the quarter was more in line with the current lumber market and selling prices in 2011 than it was in 2010. The improvement in material costs was offset, however, by a slight increase in labor and overhead costs as a percentage of sales due to a decline in units shipped. And more significantly, freight costs increased 70 basis points for the quarter due to higher year-over-year fuel cost and transportation rates. Selling, general and administrative expenses decreased by $3.3 million or 6.9%, primarily due to a decline in compensation and related expenses tied to a decline in headcount, and a decrease in certain variable selling costs. These declines were offset to some extent by an increase in accrued bonus expense and bad debt expense. Additionally, regarding SG&A, sequentially since Q2, our SG&A decreased $1.3 million in spite of a $1.2 million increase in bonus and other incentive costs tied to profits.

Moving on to our cash flow statement, our cash flow from operations was $2 million this year compared to $11 million last year. Our operating cash flow in 2011 is comprised of $6 million of net earnings, and $28 million in non-cash expenses, offset by a $32 million increase in working capital since December. Working capital increased from December primarily due to the usual and seasonal impact of our business, and as Matt mentioned, higher inventories than we'd like in certain operations. We continue to anticipate strong cash flows from operations for the balance of the year, as we move into the fourth quarter when sales volume and working capital requirements are at their lowest level. Investing activities include capital expenditures of almost $22 million, and we've recently lowered our expectations and plan to spend approximately $30 million in CapEx for the year.

Finally, we finished the quarter with no outstanding borrowings on our revolving credit facility, and almost $19 million in cash. As I mentioned earlier, we expect our cash balances to continue to build through the fourth quarter as working capital declines. That's all I have in the financials, Matt?

Thank you, Mike now we'd like to open it up for questions.

(Operator Instructions) Trey Grooms, Stephens, Inc.

So first off, the recent appointment of Scott Greene to EVP of New Business Development, I guess to kind of head up international sales and product development. Can you tell us what geographies you guys are kind of looking at? And kind of a timeframe there? And then also, give us a little color on how you might go about doing that? Are you thinking more kind of M&A, JV, or what?

Sure, that's a great question, Trey. What we are looking at for Scott, in terms of the international marketplace, obviously we are going to try to find the best opportunities where we can convert quickly to the best return. We're going to focus primarily in probably the South America and the Asian markets, predominantly Brazil and China.

What we would like to do is pattern this kind of search after what we've done with our partners in Mexico, where we have a long-standing partnership with people who are very knowledgeable. They know the marketplace, they know their business, and we'd like to look for similar situations in other countries.

With respect to new products, we are going to try to drive our new products primarily in North America to start, although those will be able to branch out as well. And we have a couple of things in the hopper that we are working on now.

Okay. And then also, talking about the potential for further industry consolidation, do you guys expect to get more active in M&A? Or do you think that just more participants would just kind of naturally exit the industry entirely, given kind of the state of the markets now?

Well, we continue to look for opportunities in the acquisition space. We've had a difficult time over the past several years in marrying up our value expectations with sellers' price expectations, and I think that continues to some degree. But we will look at opportunities where it makes sense, and we'd love to be able to help consolidate some markets. But we're going to do so in a conservative fashion.

Okay. But it would be safe to say that there might still be some guys out there that have been weathering the storm the best they can for a while, and if this is -- 2012 isn't a whole lot better than 2011, that we could see additional participants just kind of move out of the market?

We certainly expect that to happen.

Okay. Also, last quarter, you guys had mentioned that big ticket items like decking had been a drag on results, particularly decking and other big ticket items. Did that kind of continue into 3Q or have you seen any improvement or change there?

I think, overall, we've seen a little bit better performance in the retail sector, but there is still a reluctance on the big ticket items for us.

Okay, and my last question is for Mike. SG&A, a lot of things going on there, a lot of moving parts. Is this a pretty good run rate to kind of think about going forward -- kind of $44 million, mid-$40s million kind of range?

Yes, it is. You still -- this is one of the more profitable quarters historically, Q2 and Q3 are typically. So, there's a little more bonus expense in there than you would expect to see in Q4 and Q1. But other than that, I think it's a fairly typical quarter, and it incorporates -- to kind of connect the dots for you, we sequentially, since Q2, costs were down $1.3 million in SG&A, but bonus expense and incentives were up $1.2 million. So there's about a -- if you pull that out, it's about a $2.5 million decline, which is about our $10 million run rate that we told you that we were shooting for. So yes, I think this is a pretty good quarter to base your SG&A on, and just be mindful of bonus expense in Q4 and Q1.

Okay, thanks a lot, guys, and good luck.

Robert Kelly, Sidoti.

Just a question on the big box number you gave out, minus 12%, is that a total sales? Or is that a unit decline?

That is total sales, but pricing wasn't overly significant this quarter. So, the units and the units and dollars are not very different.

So the big box has yet to really change its approach to market; they're very conservative on building inventories 2011 thus far?

Yes, I think it's probably partially that, and also partially their sell through just hasn't been as strong.

Right. I guess one of the things I was hoping you guys would talk to, throughout the quarter, there's quite a bit of concern that the economy is weakening, and there's fears -- I don't know if it even applies to the residential market, but the overall economy might slip back into recession. Did you see a decelerating or an accelerating to the downside kind of demand trend throughout the quarter? Can you just speak to what you saw July, August, September?

Yes, I think overall, I don't know that there is a decelerating trend. I think we are kind of in a slow gear to start with, which is either fortunate or unfortunate depending on your perspective, so we didn't notice a deceleration any more that we normally would. And we do expect it to be difficult, but we're not going to use that as an excuse.

Understood. As far as the site built number, that's really not an apples-to-apples sales number. If we were to adjust for those plant closures, what does site built look like if you account for the locations you're no longer in?

Site built was -- well, if I'm understanding your question correctly, the entire site built decline was the plant closures. So, our core plants or our plants that were opened in both periods were flat.

Okay, that's what I was getting at.

Yes.

And as far as the -- you talked about the year-on-year build up or bridge for the gross margin improvement, what does that look like on a sequential quarter basis? You had a pretty sharp improvement from what you saw in 2Q. Is it all labor -- I'm sorry, is it all raw material costs in 3Q?

Yes, Q2 was pretty punishing in terms of the lumber market and material costs, and we saw a sequential improvement there, too.

At the end of last quarter, you gave us some color on your cost position as far as inventory, and if you said it in these remarks, I might have missed it. Are we around market cost exiting 3Q, as far as inventory?

Yes, good question. Yes, it is. Our current cost in inventory varies a lot by species, but as I compare them across the board, overall we are in pretty good shape relative to the market.

Okay, and then just one final one on the consolidation dock. What has been the experience? I mean, you've lived through a couple of housing recessions, none as drastic as the one we are going through now. When you see competitors start to fall by the wayside, is it when things are bad and they get as bad as they're possibly going to be, or do they get left behind when things start to pick up and they don't have the lines of credit or the wherewithal to serve the upturn. How does consolidation play out historically in your market?

Well, I think you have to kind of look market specific for that question, but I think the one that is probably the most focused would be on the site built side. And I think what you will see is -- if they drop out, although the cost of entry isn't necessarily prohibitive, I think the memory tends to last a little bit longer when it comes back out. So I don't think people are going to jump right back in when it starts to trend. And I also agree that getting the capital that they need to grow will not be that easy.

So, our thought process is that as people drop out, they're not likely to return in a quick fashion. But also, keep in mind that there is significant overcapacity in that marketplace today. And it will take significant reductions in order to get it back to where we believe it needs to be.

Understood, thanks again.

Steve Chercover, D.A. Davidson.

My question is also I guess along the line of the looming consolidation. I mean, do you see yourself picking off perhaps some assets, buying companies in toto, or simply seeing business gravitate to you?

Well, that's a great question. I'm not sure I have the right answer for that. I would hope that it would be a combination of all of those things. As we look at it, there's opportunities for us to be a consolidator in certain markets, and we will aggressively pursue those.

In other cases, we would hope that the business will come our way due to better service and quality. And finally, I think there's any number of opportunities where certain companies just will not be able to continue, and won't necessarily require an acquisition of any type. So, I think the combination of all those things I would say is likely to occur, and we're going to utilize our capital to the best ability to try to make that happen.

But probably the most important thing is to be a survivor, and I don't think anyone has any question that UFPI will be there at the end.

And then, you kind of tried to address it at the beginning, is there anything culturally that you would like to change from the way your predecessors directed the Company? Or is the UFPI ways already so ingrained in your DNA that it's kind of more of the same, continuous improvement?

Well, I think, I've had the privilege of learning from some pretty awesome mentors, and I've learned a lot from each of them, and we are going to try to continue to take the best of all those things that we've learned and continue to move forward. And you hit it best with your last comment -- one of the things we talk about is being better tomorrow than we were today. And that applies to every aspect of our business.

The one thing I will tell you is what we are trying to do is push our decision making as close to the actual decision as possible, and becoming a little more nimble. And that is something that I know our people are looking to do, and they are great at it, so we are looking forward to just being a little faster, more agile.

And that means delegating kind of to the plant level?

Yes, among other things, yes.

And final question for Mike. The debt that you have, you indicated that there is nothing drawn on the revolver, so the $52 million that is showing, is that capital lease obligations?

No, it's one senior note that was issued many years ago, $40 million of -- that's $40 million that matures in December 2012, so we'll pay that off when that matures. And we have $12 million or so in industrial development bonds that have maturities that are several years out. So, no capital leases.

Okay. So at the end of the year, do you expect that you will be more or less net debt free, as you usually are?

Yes, I expect -- yes, we won't be paying off any of that debt, but our cash surplus should be in the neighborhood of what it was last year.

Great. Okay, thank you both.

Ladies and gentlemen, that concludes the Q&A session. I'd now like to turn the call back over to Mr. Matthew Missad.

Thank you. And thank you again to all of you for your time and interest in our Company. We really appreciate that.

Overall, I just wanted to say how proud I am of the effort and dedication of our team. I personally am encouraged and humbled by the excitement and enthusiasm that's been created by the changes to our organization over the past few months. Please know that we will continue to change and improve as we manage to a stronger and more profitable future. Thank you again, and go Tigers.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect; have a great day.