UFP Industries Inc (UFPI) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Universal Forest Products second quarter 2012 earnings conference call. My name is Derek, and I will be your operator for today. At this time all participants are in a listen-only mode. We shall facilitate a question and answer session at the end of the conference.

(Operator Instructions).

As a reminder, this conference is being recorded replay purposes. I would now like to turn the conference over to Lynn Afendoulis, Director of Corporate Communication. You may proceed.

Thank you. Welcome to the Universal Forest Products second quarter 2012 conference call. Hosting the call today are CEO, Matt Missad, and CFO, Mike Cole. Matt and Mike will have their prepared remarks, and then we will open up the call for questions. The conference call available simultaneously and in it's entirety, to all interested investors and news media through a webcast at our website at www.UFPI.com. A replay will also be available at that website through August 17, 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.

Good morning. Thank you, Lynn, and thank you all for taking the time to join us today. We really do appreciate your interest, and we continue to work very hard to provide a good return for our shareholders. First of all, I wanted to let you know how proud I am the team at Universal. As we look back over the last 12 months, the men and women of Universal's family of companies have done an outstanding job. I'm honored and excited to be on their team. As Mike Cole will explain in more detail, our second quarter was the fourth consecutive quarter of improvement in profitability and sales growth.

We had been focusing on profitable sales growth, and are pleased to be seeing some results. Now as we analyzed our sales mix last fall, we realize we have a number of sales that we were effectively doing for practice. Now we all have to maintain a delicate balance between being competitive in the marketplace, maximizing production and delivery efficiencies, and above all, meeting the needs of our customers. However, we cannot afford to work for practice. To that end, our people have done a tremendous job of analyzing and reducing unprofitable sales, while at the same time reducing costs and improving efficiencies in our operations. And the results show that we are headed in the right direction.

We also know that some market conditions helped our performance during the first six months of the year. We spoke in April of the great weather. And we will talk today about the rising lumber market, and how it helped accelerate our sales dollar growth. Now as we run through the metrics that I like to focus on, let's start with sales. Our sales are up in each market, except for do-it-yourself retail, where as previously discussed we made some pricing decisions designed to eliminate unprofitable sales. We also decided to focus on diversifying and growing sales to independent retail customers, which resulted in healthy sales gains with these customers. In the manufactured housing market, things are improving, due in part to sales in the oil exploration areas in the Great Plains states. Residential construction activity improved slightly, but we traded market share for some better margin business. Now there remains substantial excess capacity in this market, but we still believe there is an opportunity to provide great customer service, and still be profitable. In our industrial and concrete forming markets, we continue to grow aggressively and see further opportunities for growth.

With our inventories, we are in very good shape today, due to better -- excuse me, due to better than anticipated sales in some key products. We did experience shortages during the second quarter, which had a slight dampening effect on earnings, as we had to cover these products at higher prices. We are watching our inventories closely, and trying not to get too far ahead, because we are concerned about disappointing employment figures, and lack of construction growth in the US. Our accounts receivable are still in very good shape, but we will maintain a cautious and watchful eye. And, of course, we will continue to be conservative on our business approach, and watch the signs of the coming elections carefully.

Our forward outlook, it's a good question. It is overall positive, although we expect relatively slow growth domestically. Call it cloudy, with a chance of rain. Possible thunderstorms in late October or early November. We are just not getting a clear picture of what the economy is going to do. But despite the murky economic forecast, we are playing often. We are aggressively seeking acquisition and partnership opportunities, both domestically and in our targeted foreign markets. We also continue to pursue all avenues to improve sales and profits at our existing operations. Now, I would like to turn it over to Mike Cole for a review of the financial highlights.

Thanks, Matt. I will start by reviewing our income statement. Overall, our sales for the quarter increased 9%, primarily due to an increase in lumber prices. Although we had significant changes within each market, our overall unit sales were flat with last year. By market, our sales for the retail market decreased 2%, due to a 10% decrease in unit sales, offset by an 8% increase in prices due to the lumber market.

Within this market, sales to our Big Box customers decreased 14%, while our sales to other retailers increased 21%. Last quarter, we mentioned that we lost some lower margin business with one of our Big Box customers this year. And one of our objectives has been to replace that business with sales to other retail customers. As you can see from the numbers, we've had some initial success accomplishing that objective. Our sales to the manufactured housing market increased 25%, due to a 14% increase in unit sales, and an11% increase in prices due to the lumber market. The unit increase is primarily due to industry production of HUD-code homes, which increased 16% year over year. In addition, approximately one-third of our sales to this market are for modular homes. And the most recent data for modular housing sources indicates those shipments are up 19% year over year.

Our sales to the residential construction market increased 6%, primarily due to an increase in pricing, as our unit sales were flat year over year. By comparison, housing starts experienced a year over year increase of 26% between the months of March and May. Our decline in market share was anticipated, and is due to our focus on profitability. This segment is still challenged with excess capacity, so we continue to be selective in the business that we take, in order to improve our performance. Collectively, our plants that primarily serve this market have been profitable for four straight quarters, and reported a year over year increase in operating profit of approximately $3.5 million this quarter.

Finally, our sales to the industrial market increased 25%, comprised of a 7% increase in pricing, and 18% increase in unit sales. The story there is similar to past quarters. Our plants are doing a great job of adding new customers, and increasing sales with existing customers, taking advantage of the capital investments we made in this business. One of the additional positives I see, is that the increase in our industrial sales is spread out over several regions, which to me as a clear sign of uniform focus and success.

Moving down the income statement, our second quarter gross profit percentage as a percentage of sales increased by 170 basis points, primarily due to the favorable impact of selling into a rising lumber market in Q2, while we were selling into a falling market throughout 2011. In addition, we have a more favorable product mix in 2012, and that we are currently selling less low-margin commodity products. These improvements more than offset the effect of continued pricing pressure we face in each of our markets. In addition, I should point out, that lumber prices have fallen each week since the end of May. While we have attempted to keep inventories lean and in line with current demand, if this trend continues it may result in tougher year over year gross margin comparison in the third quarter.

SG&A expenses increased by almost $3.8 million or 8.3%. This increase was driven by a $4 million increase in accrued bonus and incentive compensation expense tied to profitability, and a $1.7 million increase in bad debt expense, as we experienced a bad debt recovery that was very significant in 2011. These increases were primarily offset by a $900,000 decrease in base compensation and related expenses, and a $700,000 decrease in amortization expense. While we are always striving for improvement, overall, we are very proud of how our people continue to proactively manage these costs.

Our operating profits were positively impacted by a net gain on the disposition of property, plant and equipment this quarter totaling $6.9 million, which resulted in pretax proceeds of over $12 million. Conversely, our early retirement and severance costs resulted in a $3.5 million charge to operating profits in 2011. As a result of sales, margin, and cost improvements our diluted EPS increased to $0.88 per share in 2012. Excluding the net gain on the sale of property in 2012, and early retirement and severance costs in 2011, our diluted EPS was approximately $0.67 in 2012, compared to $0.33 last year.

Moving onto our cash flow statement, our cash flow used in operations was $20 million this year, compared to $58 million last year. Our operating cash flow in 2012 is comprised of net earnings of $22 million and $9 million in non-cash expenses, offset by a $51 million increase in working capital since December. Working capital increased since year-end, and reached the normal seasonality of our business. Investing activities included capital expenditures of almost $16 million, which is comprised of about $7 million of expansionary capital expenditures for future growth and sales.

With respect to our balance sheet, our total net debt was at $68 million, compared to $85 million a year ago. We currently anticipate strong cash flows for the balance of the year, providing us with plenty of liquidity to support future growth. That is all I have on the financials, Matt.

Thank you very much, Mike. Now I would like to open it up for any questions that you may have.

(Operator Instructions). And our first question is coming from the line of Trey Grooms from Stephens Inc. Please proceed.

Hi, good morning, Matt and Mike.

Good morning, Trey.

I guess, Matt, on your comments on kind of your outlook, I mean, obviously, mentioning that it is difficult to -- that it is kind of difficult to read at this point. But mentioning overall positive, but you sounded like that you think we could see kind of tougher times ahead this fall. Really just kind of wondering, well, I am trying to decipher what thunderstorms really means. But also just wondering what is driving that concern for you, as we kind of look out into the fall here?

Well, I will say that is a multiple of one question there. I think -- I am not trying to dodge the question, I think it's a great question. We don't have a lot of clarity. I think a lot hinges on the election. But I want to make it clear, we are not sitting back and waiting for the results. We are not changing our course. I think we will outperform our competition, no matter what the economic situation is. And I think that is the message I leave you. The difficulty is, as we try to forecast and look at what is going to happen in the economy, as you know it is very difficult to predict. There a lot of mixed signals out there.

Okay. Well, can you talk about how business trended kinds through the quarter? And how these trends kind of progressed through the second quarter, and kind of what you have been seeing thus far in July?

Yes, absolutely. I think we had more typical year. This second quarter, sales were strong during the normal strong selling season. Business went very well. I think we had a typical slowdown around the Fourth of July holiday time. And in the near-term, I would expect it to remain fairly typical, at least in most of our business segments. So going forward, much beyond the third quarter is where it gets really murky from my perspective.

Yes. And really, I was just also kind of looking at, with the comments on the third quarter, I guess later in the year, is it a concern of pull forward from decent weather and that sort of thing? Or is it just an overall, kind of uncertainty?

Yes. I think it's pretty clear that we did see a little pull forward in the first quarter. And that, over the last month or so, it became much more apparent that that did happen. The degree to which it happened, is still not totally clear, but there definitely was some of that. So as we go through the third quarter, we will just keep that in mind.

Okay. And then my last question is on commercial, I mean, sales -- it seems like sales are up pretty nicely there. I am guessing this is mostly, maybe pricing and market share gains? Ör are you actually seeing some improvement in demand on the commercial front?

Yes. The commercial and concrete forming, I think we have seen some sales growth. I think there are some bigger projects that we have been able to participate in, which certainly has helped. And I think our guys, again, are doing a tremendous job in growing that market. So there is a good combination of sales growth, market growth, and market penetration.

All right, thanks. I will about jump back in queue, and keep up the good work.

Thanks, Trey.

Your next question is coming from the line of Steve Chercover from DAD. Please proceed.

Good morning, everyone.

Morning, Steve.

A few questions. First of all, your initiative to broaden your retail base, that makes a lot of sense to grow and diversify it. But does it speak of any changes in the retail market? Like are the Big Boxes losing share? Or are they the culprits, when they ask you do work for practice instead of profit?

Steve, I will tell you that our Big Box customers are among our best customers, and we really enjoy working with them. We do see a need to diversify our sales mix, and our guys have done a very good job doing that. We would love to have more business with our Big Box customers, and we have to continue to figure out ways to be more efficient, to provide more value at lower cost, and we are going to continue to work on that. So our goal is not necessarily to lose sales in the Big Box arena, it's really more to grow sales with all customers.

Got it. Okay, and the shortage that you alluded to, I don't think you mentioned what product? And is it something you can pick up in Q3?

Yes. It was a relatively short-lived shortage. We are back in very good position on it. And part of the issue was, in the first quarter, there was a lot more takeway of this product in the marketplace of this product, than there had been in prior years. So the supply chain got short. We were able to cover with no problems to our customer, but that did impact us a little bit in the second quarter.

Okay. But you still haven't told us what product it was?

I -- it was basically a retail product. I don't want to get too specific on the items.

Okay, no problem. And then lumber prices as Mike mentioned, rose through the first half of Q2. And then they --dipped for six or seven weeks into the -- the long -- the July 4th holiday. Was there any inventory gains or losses whatsoever?

I think our guys have done a good job managing the inventory all throughout the timeframe. I think there obviously are going to be some gains and some losses, but there is nothing significant or major at this point. And I think as long as we have a fairly good and manageable trend in inventory and the lumber market prices, we will be able to deal with that issue. But we expect further declines, over the next several months in the lumber market.

Which means lower topline, but sometimes better margins for you, right?

Yes, depending on the product mix. It depends on how the products are sold, fixed price versus market-based pricing.

Okay. Last one. I am also trying to interpret your kind of cautious optimism on the outlook. So -- is it correct to say you expect continued year-over-year growth, but we will also see the typical seasonality? Does that mean you had four or five quarters of growth, but Q2 is almost always the peak, at least for the last eight years that I have been covering you? Is that still accurate?

That is still accurate.

Great, thanks. Good luck.

Thank you.

(Operator Instructions). Your next question is coming from the line of Robert Kelly with Sidoti. Please proceed.

Good morning.

Good morning.

A question on the retail building market. You walked away from the business, so volumes were down. But in the business that -- your organic business I guess, going forward. Could you give some help with what the baseline growth trend was there? Just trying to get an apples-to-apples of what you are seeing in retail? Were there not, if were not products that you were walking away from?

Yes, I think overall, we had very good growth in the products that we maintained in the retail sector. So, I think that was very good. Going forward, what we are hearing from our customers, is they are seeing a little bit of a slowdown. But we expect to see year-over-year gains.

Yes. We had a 21% increase in our sales to non Big Box customers. So, if we are able to have that, and if we had maintained flat market share overall with the Big Boxes, you are talking about strong double-digit increase.

Okay. Yes, that is helpful. So with the mix of revenue, commodity versus value ad, where is that today, having walked away from some of that lower priced business? And where would you like to have that, for the future?

It's at about 60/40 value add.

So it doesn't change from the historical?

Not at this time.

Okay, great. And as far as the competitive pricing you are seeing out there, you said it was pretty broad-based across all your industries.

Yes.

Is the pressure greatest from your -- I mean, I don't know how to -- are your struggling competitors trying to win back market share? Is it kind of predatory pricing, or just consistent with what you have seen over the past couple of years?

Yes, I think there is probably a combination, Bob, and we see some competitors that are still struggling to hang on. And they just -- they are playing the cash flow game. If they can cash coming in, that will keep them fighting for another day. I think on the other hand, there is some larger competitors that we have seen over the past few months who have I think, have come to a similar conclusion as us. There is still excess capacity out there from a manufacturing standpoint, but they also realize that paying a customer to work for them is not a sustainable business model. So, I think we are seeing some mixed signals there, in terms of the pricing game.

Okay, fair enough. When you discuss with your customers -- and I'm not asking you to comment on whether housing is recovering or bottomed or what. But is the general sense, is the optimism fairly broad-based in your retail, and res construction customer base, that we have hit bottom and we are in recovery? What is the sense you are getting from your customers?

I think a lot of folks, myself included, would like to believe that we have hit bottom, and we are climbing. I think most of our customers feel that we have hit bottom. It is still a struggle, we might be bouncing along the bottom for a while, before we do the hockey stick curve up. But I think all in all, the multifamily segment of the housing market is much stronger than the single family segment.

General sense, is that the process of recovery has begun, though?

Yes.

Okay. And as far as the SG&A of year-on-year despite the volume flat, that is kind of contrary to what we have seen out of you for the past couple of quarters. Should we still be thinking SG&A costs rise consistent with volume changes?

Well, the only reason SG&A was up, Bob, is because it was up $3.8 million. But if you pull out accrued bonus and incentive compensation which was a $4 million increase, pull out kind of the unusual increase and bad debt expense, because our receivables are in really good shape. We just had a big recovery last year, where we had a very low expense last year. Expenses were down for the quarter $2 million, even though units were up a 1 point. It's actually a bit of a head fake, if you just look at the total numbers, and you go down to the details, people did a great job on managing expenses down for the quarter. Okay, great. So there are some one-timers in there that are propping up SG&A.

Yes.

That's great. And then, just one final one. You talked about the end markets being what they were, but UFPI being on offense. Can you talk about where M&A takes you? Is it new markets, product expansion, where do you see most likely, if you were to do something, on the M&A front where it would take you?

It's going to be a combination. We are looking at -- and because of our decentralized model, we have a lot of different folks out there, looking at opportunities. We are going to have some geographic expansion, moving into areas where we currently aren't servicing, and using our existing product mix, and adding new products to that mix. We are also going to be looking at consolidation opportunities, where it makes sense for us. And in the foreign markets, we are looking to replicate with foreign partners what we do here in the states, and what they do in their native countries.

And as far as the candidate that you are looking at, multiple expectations? Have they changed appreciably, with the hope that housing is now back on the mend?

I think there is -- again, I don't know that we are putting a lot of stock in housing improving, as a backdrop for us doing these acquisitions and partnerships. We are looking at it as though, if everything were staying neutral what should we be doing? And again there is a lot of opportunities out there. We are excited about them, and we are going to pursue them aggressively

Thanks a lot.

Thank you, Bob.

At this time, I am showing no further questions in queue. I would like to turn the call back over to Mr. Matt Missad for any closing remarks.

Well, once again I would like the thank you for your time this morning, and for your interest in UFP. I am very proud of what we have been able to accomplish over the last 12 months, but I am certainly not satisfied. In fact, if you ask any of my colleagues I am rarely satisfied. Which is why we continually look at better ways to do things. We are intent on growing our company, improving our performance, and creating opportunity for our employees, all of which will lead to a better return for shareholders. While we go back to work to strive for excellence and victory, we also want to wish our Olympic team best wishes for excellence and victory in London. Thanks again for joining us today. Have a great day.

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great weekend.