UFP Industries Inc (UFPI) 2011 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth quarter 2011 Universal Forest Products Incorporated earnings conference call. I will be your operator today. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) I now would like to turn the conference over to the Director of Corporate Communications, Ms. Lynn Afendoulis please proceed.

Good morning and welcome to the Universal Forest Products fourth quarter 2011 conference call. Hosting the call today are Matt Missad, CEO and Mike Cole, CFO of Universal Forest Products. Matt and Mike will offer prepared remarks and then will open up the call for questions. This conference call is available simultaneously in its entirety to all interested investors and news media through webcast on our website at www.ufpi.com. A replay will also be available at www.ufpi.com through March 16, 2012.

Before I turn the call over to Matt Missad, let me remind you that today's press release and the presentations made by our executives include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include but are not limited to those factors identified in the press release and in our filings with the Securities and Exchange Commission. At this time I would like to turn the call over to Matt Missad.

Thank you Lynn and good morning and thank you for joining us on our investor call is morning. Although I'm still relatively new to this role, I am certain that the honeymoon period is now over since my coworkers are once again using the same derogatory greetings to me that they used to use. As we discussed in October, we are focused on becoming more profitable and I'm pleased to report that we are making strides toward that goal. Each entrepreneur in our Company is properly analyzing their operation, and is aggressively taking action to improve. In fact, each time I visit our plants, meet with our customers and vendors, and explore the new ideas that we are analyzing, I am amazed at the strength of our people and am confident that our strategy is headed in the right direction. We recently met with our key executives to kick off 2012, and the energy and enthusiasm for our growth initiatives in new products, international business, and taking advantage of our manufacturing capacity with more manufactured items, is contagious. We all know that the proof is in the performance, so please stay tuned.

As we review our fourth quarter results, I am pleased to report that our operations performed significantly better than in 2010. Our sales in the fourth quarter improved dramatically and our SG&A costs were reduced in line with our expectations. We took some necessary write-downs in the quarter to reflect our desire to sell off excess assets such as idle real estate. Now the first part of my high level review is sales. Manufactured housing continues to benefit from new business in the oil exploration areas of the US and Canada. There are also more FEMA orders on the horizon. We are finding sales growth in our distribution business as we try to add more value to each housing unit sold.

The residential construction market on the other hand is still challenging. We have been more selective in the jobs we will accept, and cannot afford to make mistakes in this market. We continue to expand our ability to provide more value through our component offerings and installed services in some of our markets, and are gaining more volume in the multifamily business. Financing these projects continues to be a hurdle for many builders who are seeking assistance and new financing models from their vendors, including us. The retail building materials market improved in the fourth quarter versus 2010. We are expanding our customer base and working on our cost efficiencies. We will be priced out of some items in certain markets based on our return on investment criteria, but we expect to pick up additional volume in other markets and with additional products.

Our industrial market sales picked up nicely as we gained market share. We are continually expanding our offerings and adding more manufactured products to our mix. Our new facility in Salisbury, North Carolina is operating as planned, and will be a source of sales growth in 2010. Finally, our commercial construction and concrete forming markets also gained share in the fourth quarter. We continue to make in roads with our approach of using our design and manufacturing capabilities to provide more cost effective solutions to our customers.

My next area of high level review is margins. Gross margins for the quarter were down almost 1% from a year ago. There is still price pressure in the market due to over capacity and still lackluster demand. As we predicted in our October call, there's been some consolidation in the RBM market among wood treaters. One regional competitor is being acquired by another and another regional treater has filed for bankruptcy protection. Now, in order to improve our gross margins, we still need to provide more value to our customers and to continue to create more efficiency in our facilities. We can do that by increasing our volumes.

The last area of our high level review is working capital, namely inventory and accounts receivable. Inventory and accounts receivable for the fourth quarter 2011 were up over 2010, but they are in line with the higher sales volumes we experienced in the fourth quarter. And we will continue to monitor credit closely throughout this coming year. Our new products team is moving forward on several new items. One of our affiliate companies recently closed on the purchase of a facility in Alabama, which we expect to have in operation during the fourth quarter of 2012. This facility will produce building products using our patented next-generation polymer technology. Now I would like to turn over it over to Mike Cole, our Chief Financial Officer, for a review of the financials.

Thanks Matt and good morning everyone. I will start by reviewing our income statement. Our sales for the quarter increased 11%, driven by unit sales that was 13% higher, and selling prices that were 2% lower due to lumber prices. Also I should point out that we carried an extra week this quarter versus last year, which caused our overall unit sales to increase by 4%. By market, sales to the retail market increased 8% due to a 10% increase in unit sales, offset by a 2% decrease in selling prices. Within this market, sales to our big box customers declined 1% while our sales to other retailers increased 21%.

As you might recall, one of our objectives is to increase our business with independent retailers. Our sales to the manufactured housing market increased 35% due to an increase in unit sales as selling prices remained flat. The increase in unit sales was primarily due to industry production of HUD code homes, which increased almost 45% year over year. The most recent data from modular housing sources indicates that those shipments continue to be soft. Our sales to the residential construction market decreased 19% for the quarter. By comparison, housing starts experienced a year over year increase of 23% for the quarter. Our decline in market share was anticipated, and is due to our focus on profitability and return, which resulted in the closure of plants in Texas and California since last year. All of our remaining operating plants are attempting to be much more selective in the business we take, in order to improve (inaudible) performance.

Finally, our sales to the industrial market increased 22% due to a 24% increase in unit sales, while pricing decreased 2%. We added over 250 new customers this quarter, and demand from existing customers seems to have improved. We are also pleased to see how widespread the strength of our industrial market was this quarter. Of the 40 plants we have that serve this market, about 25 posted strong double digit sales increases for the quarter. Moving down the income statement, our fourth quarter gross profit as a percentage of sales, decreased by 100 basis points, primarily due to an increase in material costs as a percentage of sales, and the continued pricing pressure and relative trends in commodity lumber costs in our inventory, versus our selling prices.

Selling, general and administrative expenses decreased by $2.3 million or almost 5%, in spite of carrying an extra week for the quarter, primarily due to a decline in compensation and related expenses tied to a decline in headcount, and a decrease in bad debt expense. I should point out that if it had been a 13 week quarter, our SG&A would have decreased by about $5 million.

As you saw in our press release, we incurred impairment charges this quarter related to writing down the value of some of our idle real estate. Also in the quarter, fourth quarter of 2010, we recorded a $2.3 million tax benefit related to improving -- removing a valuation allowance against the deferred tax asset. If we were to exclude these non cash adjustments from our results, our net earnings would have been $26,000 this quarter compared to a loss of about $1.8 million for the fourth quarter last year.

Moving on to our cash flow statement. Our cash flow from operations was $11 million this year compared to $29 million last year. Our operating cash flow in 2011 is comprised of $4.5 million in net earnings, $39.5 million in non-cash expenses, offset by a $33 million increase in working capital since December of 2010. Working capital increased from December primarily due to an increase in volume, resulting in greater reinvestment in receivables and inventory, and also the timing of payment of accrued payroll and a decline in accounts payable. Investing activities include capital expenditures of almost $33 million which was slightly under our estimate for the year and included about $10 million of expansionary capital expenditures.

Finally, we finished the quarter with no outstanding borrowings on our revolver and $11 million in cash compared to $43 million in last year. The decline in cash is primarily due to the increase in working capital at the end of the year that I just mentioned. That's all I have on the financials. Matt?

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

(Operator Instructions) Trey Grooms with Stephens Inc.

Could you guys talk just a little bit about -- I know you guys don't guide, but just a little bit about your expectations broadly or even just directionally for some of your end markets when you look at out this year to 2012, touching on some of your end markets there?

Yes, I think what we can do is give you the general market impressions by market if that's helpful Trey?

Yes, that would be great.

I think we're off to what looks like a good start. If you believe everything you read in the papers about the economy. Our basic approach overall is relatively flat from an economic perspective. In order for us to keep driving our sales and margin we are going to have to pick up share, and we are going to have to keep pushing our new products. If you go through the retail building materials area, we expect that to be flat to up slightly for the year, just for the industry, not necessarily UFP. MH we think there will be, again with the FEMA work that is out there and the continued oil exploration areas, that should be up slightly from last year.

If you look at the industrial products area, very modest increase in overall market size. If you want to talk about commercial construction and concrete forming, I think there will be about the same roughly as 2011. Then for the commercial construction, excuse me, for the retail or residential building materials market and the site built area, we see more push towards multifamily housing. That will be a bigger push, but overall units may be up slightly.

Okay, all right, that's helpful. I'm sorry if I missed the -- your thought on manufactured housing there.

Manufactured housing, we think with the FEMA and the oil exploration areas, that will be up from 2011.

Thank you. I'm sorry I missed that. That's all very helpful, thank you. Then also, can you talk to, on the residential part of your business, residential construction for the quarter, for the fourth quarter. Can you talk about what if you look at it on a same store sales approach, can you talk about what it would look like excluding some of those closed plants?

Yes, Mike can give you little more color on the detail there. I will give you just a general overall observation, and one of the things as I mentioned is we are trying to be more selective about the business we take.

Right.

We really don't want to do a lot of work for practice. It's important for us to try to pick the right business that we can do and hopefully be profitable at it. Mike can you give him the details?

Yes, plants that were open in both periods were down about 14% in unit sales for the quarter.

Okay. That's primarily just being selective, you know? Is at the right read?

Correct, yes that is right.

Okay. That makes sense. Thanks guys, I will jump back in queue. Great quarter.

Robert Kelly with Sidoti.

Just following up on the site built questions. With the closures, with the business or the business you're taking you're being more selective. What did that look like for the full year 2011 as far as earnings or cash flow? I know you guys have been trying to close the gap as far as the money you were losing there. Could you just update where you are coming out of 2011?

Yes, for the first part of the year Bob, that caused our loss. We had an operating loss for the whole year primarily because of the first six months of the year. But third quarter, fourth quarter, we were profitable. Which in fourth quarter, fourth quarter is a pretty slow quarter. So, that is saying a lot. So, we're pretty optimistic about the changes that have happened more recently, and that they are working.

Okay. Assuming that we are flat to slightly up from an end market perspective, the site built segment will be profitable in '12?

That is certainly our goal.

Okay, understood. As far as what you're hearing from your customers, primarily on the residential -- the retail building materials side, the demand there was stronger than I think maybe you would've expected coming out of 3Q. Is that inventory build an expectation of a strong 2012 for the retail building material universe? Or is it something else going on there driving those better unit sales?

Well, as much as I really don't like talking about the weather as an excuse, I think in this case the weather may be a benefit as you look at year-over-year comparisons. I don't think there's particularly any inventory builds going on. I think it's just -- there's more product going through the stores and we attribute a fair amount of that to just improved weather conditions year-over-year.

Now, weather was a big negative for you in the first quarter of 2011. Can you talk about what you're seeing on the demand front January and February of 2012?

We are in Michigan right now and there is very little snow on the ground this year and to me that is probably one of the best indicators we have about what the weather impact looks like.

Okay. That's a good point. I missed during your comments you talked about the industrial unit was primarily driven by share gains. You added a number of customers. I missed the total number, would you just say that again for me please?

Yes it was over 250.

And that for the full year or for the fourth quarter?

The quarter.

What was that for the full year?

I don't have it on me Bob. Sorry.

Was it like 1,000?

It's ranged -- let me put it this way. It's ranged anywhere from 100 to 200 up to 250, 250 was our biggest. It's ranged from 100 to 250 each quarter. If you want a precise number I can give that to you later.

Yes, great. Just on the balance sheet, some of your debt comes due in 2012. Not really used to seeing you guys be negative cash flow in a given year. What is the plan for the debt that's coming due in 2012? Do you expect to borrow against the revolver? Will you refinance it? Just need some help there.

Depending on what happens on the acquisitions front. If there's not a lot of action there, we'll use operating cash, I would expect to have enough operating cash flow to pay off the $40 million bullet that is due. If we're acquisitive, we just refinanced our revolver out five years and have $265 million of capacity. So, we will use it for that if we need to.

Thanks a lot guys.

Steve Chercover with D.A. Davidson.

First two quick questions, first of all, I recognize that you are deemphasizing site built construction or at least residential construction, but there's been a lot of optimism of late. Do you see any pockets of strength at all?

We definitely see regional improvement in markets, and when you start from a historically very, very low point and you make an improvement, you can have a relatively high percentage improvement but it still doesn't drive an overall market much. But yes, I think there are definitely pockets we are seeing a little life in. And again, multifamily is where the lot of demand is today. We still are in a situation though where we have come from 2 million-plus starts to basically 0.5 million to 600,000 starts. So, still a lot of excess capacity out there and I think until that problem takes care of itself, there will still be continuing margin pressure in that market.

Sure. Could you give us maybe top three or four pockets where you see some strength and if single family comes back, will you chase it again?

I will address the second question, by just simply saying we have to have business that we can earn a return on. As long as we can earn a return on the business, we will do whatever we can do to get that business. That's probably easier question than giving you the dots on a map where I think the performance is improving, because I probably don't think that's in the best interest of our shareholders to do that.

Then switching gears to industrial packaging which grew about seven times faster than the economy or at least the industrial economy, you said it was share gains. So, to what do you attribute your success?

I think I would give of all the credit to our people in our operations who are really driving this business. They are being very aggressive. They're coming up with some really creative solutions for the customers. They are actually providing great ideas that I think are resonating well with that customer base. It is all our people helping to drive that business.

One of the things that struck me years ago when I went through your facilities was how you are capable of taking little pieces of fall down or scrap from truss manufacturing for instance and using it in industrial. Are you still able to do that as efficiently now that part of the business is gone?

I think as you look at the raw material flow and where that comes from, granted there's probably not as much downfall, but I think through our efficiencies and our production model, we are actually more efficient in our plants than we used to be. We are making better use of what raw material we have available and I think we are just -- we are able to build it for a much more effective cause.

Very good. Thank you.

Follow-up from Robert Kelly with Sidoti.

You talked about the gross margin degradation from the year prior, 100 basis points. Was the 100 basis point decline all related to selling price pressure? How do we think -- there had to be some offsets there with the plant closures. Can you just help us bridge the year-over-year change?

Mike, can you give him the background on that?

Yes, dial down into the details a little bit. The 100 basis point is in that number. The material cost as a percent of sales is actually down more than that. It was about 150 basis points. So we actually, if I look at labor and overhead, and freight in general, that improved by 50 basis points. I think due in part to the improvement in volume. Primarily probably due to the improvement in volume.

Okay. One of the drags you had during the second, and a little bit in the third quarter was being behind the curve on your material costs. That's maybe my terminology. Is that still the case? Are you still dipping into higher cost materials still in 4Q? Is that part of the material cost drag or is this just selling price pressure? At market price?

I think last year as you looked at that, the market had a little bit of a run during Q4. So sales weren't a ton in Q4, it's one of our slower time periods but we were selling into a rising market in the fourth quarter of 2010. This fourth quarter's been pretty flat and so we didn't have that benefit. But like we said earlier, there is still pricing pressure with customers, so that's a little bit of a drag. As I look at where our costs are today in inventory, they are in good shape relative to the market.

Great. Just one final one. You touched on the stability or the relative stability of lumber prices, especially as it relates to 2011. At the beginning part of 2011. There's a disconnect with some of the optimism I'm hearing from you and from other folks that participate in this space. Wouldn't lumber be stronger if you are seeing pockets of strength on the site built side and the multifamily site?

I think that goes back to probably the overall capacity issues. One of the things that helps strengthen the market is the number of mills that have been shut down. Also, a lot of the product that has been going overseas has had a big impact on the market. To us as we have learned, it's really more about the timing of the inventory purchases and how the market flows than it is year-over-year demand. Right now, I think there is still plenty of capacity at the mill level, and although demand has improved, it's still not strong enough to push the needle much yet. I think there's a lot of folks that are relying on the lumber market to help them with their business this year. If there is a slight hiccup in the market, it may negatively impact some of our competition more than us.

Okay, great, thanks guys.

Will Nasgovitz with Heartland Advisors.

You might have touched on this and I apologize if I missed it, but did you outline what your capital budget will be for 2012?

We had not mentioned that. Our capital expenditure budget is about $40 million for next year, which includes quite a bit of expansion on our CapEx.

It's up from $33 million right. I was curious, I think this has been touched on in prior calls, but assuming sales in maybe this year or next more than likely I guess, exceed the $2 billion level. What type of -- can we hold SG&A at these levels? Just any perspective on that would be helpful.

It would definitely be our goal to be able to maximize the utilization of our existing people and facilities. I think the levels you're talking about we are certainly capable of maintaining the facilities we have and the SG&A level that we have and still achieve those kind of numbers. So, that is clearly our goal. That will help us reduce our costs and improve our margins as well.

Great, thanks for the color and best of luck this year.

With no further questions in queue I would like to hand the call back to Matt Missad for closing remarks.

Thank you and thanks to all of you for your time and listening this morning. Overall, I am very proud of our team and I am excited about all the positive things we are working on. We're all very thankful for your interest and investment in UFP and we will keep doing our best to provide you and our employee shareholders with a great return on your investment. Thank you, and let's hope that the Red Wings keep their streak alive.