UFP Industries Inc (UFPI) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Universal Forest Products, Incorporated, third-quarter 2012 earnings conference call. My name is Janetta, 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 Ms. Lynn Afendoulis, Director of Corporate Communications. Please proceed.

Thank you. Welcome to the Universal Forest Products third-quarter 2012 conference call. Hosting the call today are CEO Matt Missad, and CFO Mike Cole. Matt and Mike will offer prepared remarks, then we'll open up the call for questions.

This conference call is available simultaneously and in its entirety to all interested investors and news media through a webcast on our website at www.ufpi.com. Replay will also be available at that website through November 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.

Good morning. Thank you for taking the time to join us this morning. We appreciate your interest. To be clear, I will not be giving any kind of weather forecast or other predictions on future events for today's call. Instead, I will just get right to our third-quarter 2012 review.

On the surface, I should be disappointed with our third-quarter earnings, and I am. Earnings are down $0.08 per share from the third quarter of 2011.

However, the real story is beneath the surface. We were hit with a one-time Canadian countervailing and antidumping duty for imported aluminum to the tune of $2 million. We are appealing this ruling, which we believe is unjust on many levels, but we have recorded the full charge in the third quarter to be conservative.

In addition, we had two facilities which had an atrocious performance in the third quarter. While we typically expect a few operations to struggle for a brief period, these facilities were exceptionally bad. The problems causing their poor performance have been corrected, and all indications are that these facilities have returned to normal positive results. The difference between normal results and the actual results for these facilities in the third quarter was $2 million.

The total of these events impacted pre-tax earnings by $4 million for the quarter and turned an otherwise good quarter into a disappointing one. As always, I accept responsibility for our total results; and we can, and will, do better.

But as a shareholder, I'm also very encouraged by the successes we are experiencing in the vast majority of our facilities. The facilities and their dedicated employees have demonstrated great progress toward our growth and profitability goals.

In the quarter, sales increased nicely in four of our five markets, and declined only slightly in the retail building materials market, which was consistent with our previously discussed strategy to not work for practice. Now, we also benefited from a higher lumber market versus 2011 and were able to keep volumes consistent with the strong unit sales of third quarter of 2011.

As we look through my other key focal points, namely margins, inventory, and receivables, we have seen mixed results for the quarter. Margins are down somewhat, due primarily to higher lumber market, which Mike will address in a few minutes. We still face excess capacity in most of our markets, which keeps pressure on margins. We need to continue to add more value, as we develop new products, in order to enhance our margins.

Inventories are higher, also due to the higher lumber market. We have increased our focus on inventory to make sure we do not get out of balance with the market. Product mix and market position are critical, given the higher material cost and the traditionally slower sales period in the fourth quarter.

Our accounts receivable are up as well, due to higher selling prices. The percent current of our accounts has improved over the third-quarter 2011, and we continue to keep an eye on construction growth and manufacturing output in the US to give us indicators for the continued credit worthiness of our customers. Most importantly, as a Company, we continue to be very well served by our diversified, balanced business model, and we'll continue to develop in a balanced fashion in the future.

Now, as we look ahead at the remainder of the fourth quarter and through 2013, we see some positive signs in the housing market, tempered somewhat by uncertainty over taxes and regulatory policy as well as the fiscal cliff. We remain very bullish about our team and our ability to execute our business. Our goal is to outperform all of our competitors, regardless of market conditions.

Having been in our facilities on a regular basis, I can tell you that I am continually impressed with the hard work and ingenuity of our people. I am gratified to have American manufacturing success, which allows us to offer our employees a chance to grow their personal and professional opportunities. We intend to continue to provide these growth opportunities through both organic growth and acquisitions. Our acquisition team has been working very diligently to identify targets and create mutually beneficial arrangements for the future and is yielding very good results.

Our new products initiatives are gaining steam as well, and we anticipate limited market tests of our Eovations products over the next 12 months. This revolutionary technology is our non-wood alternative, which has performed very well in preliminary testing. Since it has no wood flour, it doesn't absorb moisture, has excellent strength-to-weight ratio, and can utilize recycled materials in the manufacturing process. It has a number of applications in many of our markets, including residential construction, commercial construction and concrete forming, industrial, and manufactured housing.

In addition to this new technology, we are also developing many product-line extensions for our core products to provide more value to our customers, and ultimately, to the consumer.

On the international front, we continue to seek strategic partners, and have utilized our existing relationships in foreign countries to help facilitate these conversations, and we are encouraged with the progress so far.

Now, that concludes my overview. Now, I would like to turn it over to Mike Cole to review more on the financial results.

Thanks, Matt. Before I review the financials, I want to point out that the higher level of the lumber market had a significant impact on some of our key numbers this quarter, as Matt mentioned. Lumber prices were up 25% on average, which impacted not only our sales levels, but our working capital, cash flow, and margins.

Starting with our income statement for the quarter, our overall sales increased 13%, primarily due to lumber prices. While we had significant changes within each market, our overall unit sales were essentially flat. By market, our sales to the retail market decreased 3%, due to a 10% decrease in units, offset by a 7% increase in prices. Within this market, sales to our big box customers decreased 16%, but this was offset by a 16% increase in sales to our other retail customers.

Earlier this year, we mentioned that we lost some lower-margin business with one of our big box customers, and one of our objectives has been to replace that business with sales to other retailers. As you can see from the numbers, we have had some success accomplishing that goal.

Sales to the manufactured housing market increased 35%, due to a 14% increase in units and a 21% increase in prices. The unit increase is primarily due to industry production of HUD-Code homes, which increased 11% year over year in July and August, and the fact that we continue to increase share and add product lines in our distribution business.

Sales to the residential construction market increased 34%, due to an estimated 20% increase in units and 14% increase in prices year over year. By comparison, housing starts experienced a year-over-year increase of 24% between the months of June and August.

This segment is still challenged with excess capacity, so pricing and margins are still difficult. So, we must continue to be selective in the business that we take in order to maximum profitability. Collectively, our plants that primarily serve this market have been profitable for five-straight quarters and reported a year-over-year increase in operating profit of approximately $1.4 million this quarter.

Finally, our sales to the industrial market increased 20%, comprised of an 11% increase in pricing and a 9% increase in units. The story here is similar to past quarters; our plants are doing a great job of adding new customers and increasing sales with existing customers. One of the additional positives we see is that the increase in our industrial sales is spread out over several regions, which is a clear sign of uniform focus.

Moving down the income statement, our third-quarter gross profit percentage, as a percentage of sales, decreased by 120 basis points, primarily due to the higher level of the lumber market. As you might recall, we generally price our products to earn a fixed profit per unit, with commodities being a pass through. Therefore, in periods of higher lumber prices, our gross profit percentage declines.

Selling, general and administrative expenses increased by $400,000, or [9 -- 0.9%], but declined as a percentage of sales due to lumber prices. The dollar increase was primarily driven by a $500,000 increase in costs to prepare our Eovations production plant for operations, $500,000 increase in compensation-related expenses, and $400,000 in various selling costs. These increases were offset by a reduction in accrued bonus and other incentives tied to profitability.

Our operating profits were negatively impacted by a $2 million loss contingency related to an antidumping duty assessed by Canada. We have accrued for the entire amount of our exposure in this matter. Excluding the loss contingency, our operating profits exceeded the third quarter of 2011. Lastly, our effective tax rate increased to 37.9%, compared to 35.4% last year, primarily due to the expiration of the research and development tax credit.

Moving on to our cash flow statement, our cash flow from operations was $4 million this year, compared with $2 million last year. Our operating cash flow in 2012 was comprised of net earnings of $26 million, another $26 million in non-cash expenses, offset by $7 million in gains on the sale of property, plants and equipment and a $41 million increase in working capital since December. Our investment in working capital is solely due to the higher lumber prices. Our cash cycle has been steady at 46 days.

Investing activities include capital expenditures of almost $22 million, which includes about $9 million of expansionary.

Finally, our working capital and investing activities were funded through our borrowings from our revolving credit facility. At the end of September the facility still has a total remaining availability, after letters of credit, of almost $230 million.

With respect to our balance sheet, our total net debt was $53 million, compared to $34 million a year, again due to the higher lumber prices on working capital. We also have a bullet maturity due in December on $40 million of notes payable. We are currently finalizing a transaction to refinance these notes, which will be announced in Q4.

That's all I have on the financials. Matt?

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

(Operator Instructions) Trey Grooms, Stephens.

Could you guys give us a little bit more color? I'm still scratching my head here on what's going on with operating profit, or even gross profit for that matter, given the increase you saw in sales. I know, Matt, you outlined a couple of one-time costs, I guess, that were in the quarter. Can you give us a little more color on that?

Also, when -- as we are sitting here today, looking forward, if lumber continues to move up, is this what we should continue to expect from a margin standpoint, or if you could just give us a little color on that? Thank you.

Trey, I will start in on the gross margin number. When you have, like I mentioned in my comments, when you have much higher lumber prices like you have that are driving the increase in the sales dollars, when you are pricing on pretty much a fixed profit per unit type of formula, you are going to have a shrink in the margin.

And, that's really what is driving the gross margin decline. Another way to think about it is unit sales are flat, gross profit dollars are primarily flat.

That being said, as Matt alluded to in his comments, there's a couple of areas where we were a little disappointed in performance. And, that -- we could have shown an increase in gross profit dollars from what we are showing today but for that performance.

And that was -- what was the impact again? I heard a $2 million number, then a $4 million. Sorry if I missed it.

No. $2 million was the Canadian duty number. An additional $2 million was operating poor performance issues.

Okay, so --

The underperformance is primarily sitting in the gross profit line, Trey, and the loss contingency for the Canadian duty is sitting right underneath SG&A.

Okay. Still -- $64 million increase in sales year over year, and if you add that $2 million in, then you are still less than $3 million increase in gross profit. Is there anything else like a -- the business you are walking away from, is that impacting? Is there anything else that's going on there?

No. Trey, to me it is the lumber prices, and that's why I pointed it out at the beginning of the call. When you have the lumber prices that are that much higher, you are going to get that kind of an impact on the gross margin line. Moreover, when you asked earlier, what do we expect going forward? To the extent you continue to see that kind of a spread between lumber prices last year and this year, that's going to continue on into Q4, in your expectations.

Okay. Then --

It is not a -- we don't view it as a profitability driver. Unit sales drive profitability, unless there is some trending in lumber prices. Just the higher level of the lumber prices just makes it look like large margins have shrunk.

Got you, okay. Then Matt, on the last call you did give us a little bit of an outlook. You said this go around, you're not going to be giving us any forward-looking statements at all, I guess, on -- as far as your outlook there.

Yes.

Is there reason behind that? Is it just a level of uncertainty, as we sit here today, or --?

Yes. I think what I'm comfortable with, Trey, is I have a lot of confidence in our people and our ability to execute. It is the things that we don't have any control over that I don't want to try to predict what is going to happen. We'll execute, and we'll beat our competition. That is our goal.

Okay. Can you at least talk about what you are seeing thus far in October?

I think what we are seeing is a mixed view. If you look around the country, there's certain pockets that are certainly stronger than others. There's cautious optimism in the housing market. We see that in some markets; we don't see it in others. So to me, I think it is a status-quo situation, at least at this point.

All right. My last question, you gave us a little more detail on the new products you are looking at rolling out, this new technology. Can you -- what is the timing on that, roughly? And, can you give us a little bit more color on what the distribution channel will look like and that kind of thing?

Yes, we are still in testing, Trey. And as I mentioned, it will be the next 12 months we will do limited market tests in several different product lines. So, I would imagine by Q3 of 2013, Q4 we will have a very good picture, in terms of what the potential market looks like, and distribution channels, and how we are going to take it to market.

Okay. All right, thanks, guys.

Steve Chercover, D.A. Davidson.

Just a couple quick questions. First, can you expand on the nature of the duties on the aluminum? Is this for some kind of decking material, and I guess the US doesn't have a similar problem with the Chinese product?

It's actually -- the US does have a similar problem. It is just in how they chose to enforce it and how they treat the product.

It is primarily decking products that we import. Basically, the issue with the Canadian situation, without going into too much detail, is in how they apply the duty in a retroactive fashion and on a product that we don't believe the duty is applicable to.

All right. So there is a chance it could be reversed, but the $2 million is the entire potential liability as it stands right now?

That's correct.

Okay. My other question, given that you ceded low-margin business at the big boxes, shouldn't we see your margins go up? Or, will we see them go up going forward, given that you've gotten rid of this business that you don't do for practice?

I think, Steve, that's a very logical question, and I would tend to agree with you. I think there's a couple other things that are still sitting out there. We have gotten rid of a lot of low-margin business; and overall, we have improved in many areas.

There still are capacity issues out there in a number of the markets. So, we aren't seeing an immediate rise in overall margin; and as Mike pointed out, the lumber market impact on gross margin percentage, obviously, brings that down. So gross margin dollars should be up, and we look forward to continuing to try to increase that going forward.

That is a really good question, Steve. I guess the way that I look at it, too, is -- just to add on to what Matt said, is we're essentially flat unit sales. But if not for the issues Matt had mentioned on a couple of plants, our gross profit dollars would have been up $2 million, which is pretty good.

Yes. Last quick question, I know you are not going to give us segmented earnings, but could you tell us, rank in order, perhaps, the relative profitability, which is the most lucrative business?

How many competitors do we have on our call today?

I'm sorry, we lost the connection a little bit (laughter).

No, well -- maybe we can take that offline. But maybe there is no answer that you are willing to share. But I just -- is one -- are any of these businesses vastly more profitable than the others? Or, they're all the same?

Obviously, the answer to that, Steve, is yes. But, for obvious reasons, we don't want to get into providing that information.

All right, then. Thank you.

Robert Kelly, Sidoti.

A question on gross margin. If we look at it on a sequential basis, because the level of the lumber market was pretty similar in 3Q compared to 2Q, your revenues were down $60 million or so from 2Q, but gross profit is down 16%. How do we reconcile the dollar and the gross dollar and the gross profit discussion you had earlier on the year-over-year, as far as it relates to the quarter-on-quarter?

Are your units down 16% sequentially? I'm trying to figure out how it all adds up.

A sequential decline from Q2 to Q3, all other things being equal, Bob, is that -- I would totally expect that. A lot of that is operating leverage, so that would not be unexpected at all.

Okay. Is it utilization goes lower in 3Q? I guess the question is --

Likewise is, and we've probably talked about this in prior calls is, you would expect the same sort of effect from Q3 to Q4. When our sales drop like that, there's so much operating leverage in the business that you are going to get some margin pressure.

Right. Has price competition intensified in 3Q?

No. I don't think it has significantly. I think Mike's right, on the operating leverage. There's another dynamic that probably comes into play here, and that is the timing of the lumber market rise and fall. What you have is, you have some opportunities, at least in the second quarter this year based on the way the lumber market rose, to enhance your margin on the buy side.

Those opportunities were not as clearly presented in the third quarter, based on the level of the lumber market. That is probably the missing piece, Bob, as you look at it, is that market position we were able to take in the second period.

Okay. It looks like you had an intra-quarter run 3Q, lumber; it settled out for the past -- the final four to six weeks. Is that playing into the gross margin compression?

Yes.

Okay, thanks. As far as 2013 sets up, you go to your fixed cost product customers with pricing soon, is that right?

That's correct.

Is there any opportunity to build in some wiggle room with the lumber level being -- the level of the lumber market being a little bit higher in 3Q '12?

Certainly in some markets, but I'd say, by and large, there is still that capacity issue. And, the competitive nature of the marketplace is not allowing for much in the way of margin enhancement.

Now, we expect that there may be shortages if the economy turns around and moves forward, and that will impact our ability in a positive way. But for right now, I wouldn't want to rely on us being able to have any significant margin enhancement.

Okay. Then just one final one, in retail building materials, you start to lap the low-margin business that you divested, or walked away from, in 4Q '12, is that correct?

Correct.

So --

Actually, that will take place in 2013.

Okay. So all else held equal, if you continue to have success in the retail building material, the wholesale distributors, and hold share in the big box channels, would retail building materials be on a growth trend for '13?

Yes, we would hope so.

Okay, fair enough. All right, thanks, guys.

At this time, we have no further questions. I would now like to turn the call back over to Mr. Matt Missad for any closing remarks.

Again, I would like to thank all of you for your interest in UFP and for joining us on the call here this morning. While we can't guarantee anything, we do promise to keep moving forward and to provide the best return for your investment in us.

Also, I would like to wish the Tigers good luck; and hopefully, they will make it to the World Series. Have a good day.

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