UFP Industries Inc (UFPI) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2013 Universal Forest Products earnings conference call. My name is Andrew and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Lynn Afendoulis, Director of Corporate Communications. Please proceed, ma'am.

Thank you. Welcome to the Universal Forest Products first-quarter 2013 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 at www.ufpi.com. A replay will also be available at that website through May 17, 2013.

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 turn the call over to Matt Missad.

Thank you, Lynn. Good morning, ladies and gentlemen. We really appreciate you taking the time to listen to our first-quarter 2013 earnings call. Before we get started, we would like to express our heartfelt thoughts and prayers for the victims and their families in this week's tragedy in Boston. Boston is a great city and I'm sure they'll bounce back stronger than ever.

I'll start the call by congratulating and thanking the wonderful employees of the Universal family of companies for a very good first quarter. Our team has buckled down, focused on improving profitability and they are succeeding. Even more encouraging is the fact that we can and will do better.

In reviewing our business metrics, we have to recognize the big impact of the lumber market on our metrics. Our sales were up 21.3% versus last year and unit sales were up slightly by 2% versus 2012. As we go through by market, retail building materials was down both in dollars and units. The same-store sales of our products are down versus 2012 at the big box retailers. We believe that much of this difference is related to weather, which was much better for DIY projects in 2012 than this year so far, but we are hopeful that unit sales will increase as the weather improves. Our industrial sales were up 20% for the quarter and unit sales were up 5%, primarily as a result of our acquisitions. We believe that the overall industrial market was down slightly in the first quarter, but we continue to gain share and have, in fact, added over 300 customers in the first quarter.

Manufactured housing sales were up 43% to $89.9 million for the quarter. Unit sales were up 8%, primarily due to gains in the distribution business and some increase in order files. Now we did note a slight pullback by our customers in March, as their order files shrank somewhat but we expect this to improve in the months ahead. We're also looking to add new products in this market through our distribution opportunities and also expect to see some vertical integration this year from our customers. The commercial construction and concrete forming sales increased 54% in the first quarter to $30.4 million. Unit sales were up 33% as we look to provide more and more value-added products to our customers in this market and to take advantage of our design and engineering capabilities. The residential construction sales were up 43% to $74.3 million. The unit sales in that market also increased by 22%, primarily due to stronger demand. We are pleased with the sales dollar increase overall and are looking for better unit sales in the second quarter as long as the weather and the economy cooperate.

Our next metric, profitability, was squeezed by the rising lumber market and fixed price quotes on certain items. Of course, our gross margin declined on our fixed adder business, as the fixed adder represents a smaller percentage of the sale. While our gross margin shrank to 10.3%, gross profit increased by $57.2 million. Our operating margin is improving as we see the benefits of increased operating leverage in our overall profitability.

Looking at our inventories, they're up $72 million over 2012, primarily because of the lumber market that's between 40% and 50% higher than 2012, depending on the items. We also have bought material for some future projects to lock in pricing, which has increased the amount of inventory we're carrying. We expect inventory to remain at higher values, due primarily to the higher lumber market throughout the first half of 2013. As you would expect, our accounts receivable is also up. It's $40 million higher than the first quarter of 2012, again due primarily to the higher lumber market. We continue to improve our percent current of accounts receivable and we're seeing an increase in requests from customers for higher credit limits, again primarily due to the higher lumber prices.

As we move forward to achieve our strategic growth initiatives we're also seeing good results, as well as some more improvement opportunities. Our new product sales for the quarter were up over 41% to $16.9 million versus $12.3 million in 2012. We continue to launch more new products and have increased our pipeline of potential new products significantly. We also have a program to welcome new product ideas from our stakeholders where they will receive an incentive for each good idea that is marketable. We continue to improve our sales of our branded products, as well. Our relaunched ProWood brand of preservative-treated products is providing good differentiation for our independent retail customers. We continue to look at different opportunities in our non-wood product lines as the markets for those products continue to evolve.

Now I'd briefly like to highlight some other macroeconomic factors which may affect our business in 2013 and beyond. Our big area of focus right now is the lumber market. With prices hovering in the $425 to $475 per thousand board foot range, we feel very confident that given a reasonable economy we will eclipse our sales numbers for the year versus 2012. However, we still are very focused on growing our unit sales and expect to be able to achieve unit sales growth as well. There's a shortage of supply of certain items but we feel very confident that our relationships with our vendor partners will enable us to get our share of the available supply. We also remain cautiously optimistic with the general economy thus far in 2013 and we follow all the indicators closely. Our management team and our employees are confident that we will outperform the economy in the long term. Now I'd like to turn it over to Mike Cole to address some specific 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 our key numbers this quarter. Lumber prices were up 43% on average, as Matt mentioned, which impacted not only our sales levels but also our working capital, cash flow and ratios like margins.

Starting with our income statement for the quarter, our overall sales increased 21% due to a 19% increase in prices and a 2% increase in units. Unit sales increased as a result of business acquisitions and results varied quite a bit by market. Our sales for the retail market increased 5%, which was comprised of a 15% increase in prices offset by a 10% decrease in unit sales. We believe the decline in units was due to poor weather this quarter compared to very good weather in the first quarter of 2012. We continue to be optimistic that we'll grow unit sales to the retail market for the year because of the share we gained through the proposal process for 2013 business in which we added well over 100 stores to our portfolio.

Our sales to the manufactured housing market increased 43% due to a 35% increase in prices and an 8% increase in units. By comparison, industry production of HUD-code homes increased 3% and we believe modular home production also increased during the period. Our unit sales increased greater than the market due to share gains in our distribution business in which we continue to add new product lines. Our sales to the residential construction market increased 43% due to a 21% increase in prices and a 22% increase in units, resulting from a strong increase in housing starts again this quarter. While increases in commodity costs may be a new headwind to future demand, we remain optimistic about industry forecasts for growth in this market. Finally, our sales to the industrial market increased 20%, comprised of a 15% increase in pricing and a 5% increase in unit sales due to acquisitions we recently completed. We also added about $9 million of sales this quarter with new customers, which helped offset soft demand with existing customers.

Moving down the income statement, our first quarter gross profit as a percentage of sales decreased by 140 basis points, primarily due to higher -- primarily due to the higher level of year-over-year lumber prices. As you may recall, we generally price our products to earn a fixed cost per unit with commodity costs being a pass through. So in periods of higher lumber prices our gross profit percentage declines. Taking this into account, a better analysis of our profitability lies in the comparison of the change in our gross profit dollars versus the change in our unit shift. We're pleased to report that our gross profit dollars increased 6.5% this quarter, which compares very favorably with our 2% increase in unit sales. Our increase in profitability resulted from the benefit of selling into a rising lumber market on many of our products this quarter. This benefit was offset to some extent by the impact of rising lumber and labor costs in our turnkey framing operations and a decline in unit sales to our retail customers.

SG&A expenses increased by $2.5 million, or 5%. This increase was due to increases in compensation and related expenses. The increase in these costs exceeded our unit sales increase due to the weather-related decline in our sales to the retail market. Overall we're very pleased to report a $1.3 million increase in our operating profit this quarter to over $9 million. As we mentioned in the press release, this is our best first quarter since 2006 and we're very proud of the efforts of our people.

Moving on to our cash flow statement, our cash flow used in operating activities in 2013 is comprised of net earnings of $6 million and $8 million of non-cash expenses offset by a $79 million increase in working capital since last December. Our investment in working capital has increased year over year primarily due to a 43% increase in lumber prices. Under investing activities, capital expenditures totaled $8.1 million, which includes $2.2 million related to expanding capacity for new products and industrial business. We also completed two business acquisitions, which cost $8.6 million this quarter. Finally, our operating and investing activities were funded through borrowings under our revolving credit facility, which has a remaining availability of $166 million. With respect to our balance sheet, our total debt increased to $155 million compared to $86 million a year ago which, again, was due to the higher -- impact of higher lumber prices on working capital. Overall we're very pleased with our capital structure and liquidity to fund future growth and see our balance sheet as being a competitive advantage. That's all I have in the financials, Matt.

Thank you, Mike. We'd now like to welcome any questions that any of you may have.

(Operator Instructions) Steve Chercover, D.A. Davidson.

Felt like I'm on a game show but I wasn't even that fast with star one. Congratulations, first of all, it's nice to see a solid turn. With lumber prices -- I think they're probably at their peak and you're improving efficiency, do you think the margins are going to continue to get better through the year or I guess SG&A -- pardon me, cost of goods as a percent of sales will decline?

I think that's our hope and as long as we keep going down the path we are and the pricing remains stable then yes, that would be a reasonable expectation.

There's a fair amount of operating leverage in the business, Steve, so as unit sales grow we expect to be able to pick that up in the margin.

That's what I'm hoping, as well. And then SG&A clearly that's where you beat me in a big way in the current quarter -- and I apologize if I'm multitasking -- but do you expect it to ramp up as your sales ramp up or is it going to stay at a constant percentage of sales?

It actually should remain fairly constant, I would think. We may need to add a little bit depending on how much we grow, but it will be less than the rate of growth of sales, we think.

And is the share price for any kind of incentive compensation Incorporated into that SG&A line?

Yes, our bonus accrual and our sales incentive accruals are both in those -- in that line item.

So assuming that the share price appreciates we could see a little bit of a headwind there?

Well it's tied to profits, but --

Yes, very little is directly related to the price of the shares.

Okay. Thank you.

As profitability increases and gross profit increases, sales compensation and bonus both should increase. That line item in the income statement should be one of the line items that has the most operating leverage associated with it, the most fixed cost.

But we're not going to see it -- well, it will take some time obviously for your sales to ramp up to 2006 levels, but at that stage we're running more in the more 60s to 70s as opposed to the upper 40s. It'll take a while to get there, obviously.

Correct. Absolutely.

I guess that would be a nice problem to have. And then finally -- sorry, as I said I was multitasking -- Mike, you're drawing on your revolver or taking on some debt to fund working capital, by year end will that reverse itself? Will you be pretty much debt free again?

Yes, this is our -- thanks for pointing that out. This is our peak time for working capital so now through June into July and then that'll start coming down pretty rapidly from August through December.

You don't necessarily have to be debt free. We're not going to hold you to that, but if anything we might see the year-end debt lower than 2012 since it looks like we're on track?

Yes, because we expect to be -- we expect profits to be good and cash flow to be good. If the lumber market continues to rise that would be a factor towards working capital being a little higher but if the lumber market stays where it's at we expect operating cash flow to be very good.

The futures market seemed to indicate that it's going to come down a bit. Is that your view, as well?

It's going to be a bit of a bumpy ride here. It'll bump up and down within a trading range we think for a while here and then after the end of the second quarter we'll see it return more to normal levels again as long as there isn't any great increase in demand.

Maybe I could ask you one kind of left field question then I promise I'll relinquish it. Are you guys of the belief that we could be in for a lumber super cycle?

That's a great question. I think right now the supply side of the chain is ahead of the demand side of the chain, which has been a switch from three or four years ago and that's why you're seeing some higher prices. The so-called super cycle, I guess we're going to have to let that play out and see what it looks like, but certainly the supply side of the chain is ahead of the game.

Great. Well, thank you both.

Thanks, Steve.

Ethan Steinberg, SG Capital.

Hi, guys. Nice quarter. A couple of questions, I'm still trying to get familiar with a couple things. The 2% unit in the quarter growth, I would love to understand the cadence of that through the quarter, and particularly how the anniversarying of that big loss customer affected that unit growth for the quarter.

Probably can't give you the details of that but I can tell you just generally from the big box standpoint, their unit sales are still down year over year for our products.

Okay. I guess what I'm just coming at is I looked at is there a way you can guess or give us some sort of sense qualitatively of what the unit pressure optically was on that 2% versus what it felt like coming out of the quarter when I assume weather is a little bit better or how much weather impacted it and how much that one customer might've impact it if the 2% is much understated to what intrinsic or end demand would be for you guys?

It would probably be helpful to talk about just the retail market rather than the overall because the 2% reflects -- 2% increase reflects the overall business. Retail was down in terms of units 10%. We feel pretty strongly like that was why -- we picked up, like I said, well over 100 stores with retail customers for 2013 business, so we're looking at every bit of expectation that unit sales will grow because of those share gains for the balance of the year. I guess to add a little more color, if the lumber prices had stayed flat, if weather wasn't a factor and we were looking at the full year I would have had an expectation that units in retail would've been up maybe 5% from the share gains that we had.

Okay, even with the two months of pressure from the one customer?

Yes.

Is the weather any better now?

Up north we're still sitting in some rain and we're still waiting for summer to -- spring actually to hit, but we expect that'll happen in the next few weeks.

And most of the -- just to add a little more color -- most of the share gains we picked up were in the Northeast and in the Midwest where weather's definitely been a factor.

Okay. But, yes, I guess it just speaks to the unit growth rate could really accelerate as you get into warmer weather and given the comparison if you had in the first quarter would still get the 2%, is that fair?

That's fair. It's a good way to look at it.

Lumber's actually down quite a bit since the beginning of the year depending on which product you look at but on average down quite a bit. What do you think that impact would look like today if you had the same quarter, is that going to help or hurt the P&L?

Ethan, I'm not sure I understand the question. Did you say lumber was down quite a bit since the beginning of the year?

Lumber prices today have come down quite a bit since the end of the quarter. I'm just (multiple speakers) trying to understand is that going to -- would that help or hurt -- what would that do to the same quarter you just reported if lumber prices were down here or came down in the quarter?

Well, it depends on the manner of how the market moves is probably more important to us than the fact that it does move. We prefer a stable lumber market or a steadily-rising market. A rapidly-falling market's not good for anybody in our position, but as long as it's manageable and stable we'll be fine with it.

Okay. And just -- the other person asked an interesting question, so the SG&A dollars if they stay -- do you think they can stay pretty stable in dollar amounts?

Yes, they will adjust relative to the profitability due to our compensation structure, so as profitability improves you'll see that increase but a fixed portion of that definitely will remain much more stable.

Got it. And are there any big comparison issues that help or hurt the volumes over the next few quarters or through the rest of the year that I should ask about?

I think you hit on the main one for us, which is what's going to happen in the DIY sector.

Right. Okay, but it sounds like that's actually pretty healthy if it would've been up 5% without the weather, is that correct?

Correct.

Great. Thanks, guys, good quarter.

Thank you.

Thank you. Robert Kelly, Sidoti.

Good morning. Hey, how you guys doing? A question on -- 2% unit growth but gross profits were up in excess of that unit expansion. Is there some read through to industry pricing discipline, is it starting to get better? The increase in lumber is it providing more stability as far as your ability to get price from your customer?

I think that's a never-ending process. We're going to make sure that we can pass along our price increases and as you know we have a lot of different moving parts depending on whether it's a fixed price item or a fixed adder-type item. So you're seeing a little bit of the confluence of those types of items, Bob, but I think overall the customers do understand that prices have gone up and they understand the costs have gone up. So at least the discussion is occurring and there's generally more understanding about it.

Okay. Well, that's encouraging. At this point in the cycle cost recovery is still going to be a challenge but it sounds like things are getting a little bit better on that front?

We sure hope so.

As far as the delta, I think I get as far as the SG&A dollars they're pretty fixed until you see a material volume increase. What exactly is the delta for that compensation piece to profitability? What should we be building in for that number based on our profit assumptions in the out years?

I guess all I can point you to is if you look at how our ROI bonus program works it's pretty well detailed in our reports and if you try to take a look through there you can probably peg it fairly accurately. It's a little more complicated than try to tackle on the call.

Okay, fair enough and then just one final one. Your capitalization is solid. Your competitors, especially the smaller independents, not necessarily the case. Have you seen distress increase amongst your competitor base with lumber shooting up and volume starting to recover a little bit?

Yes, one of the things that we are seeing is a little more credit pressure, in particular with the vendor community. Obviously, we're in a very good situation, well-capitalized and we're seeing some of our under-capitalized competitors are having trouble with credit limits now and not being able to buy the material that they need. It's not a widespread issue yet but obviously our hope is that their costs will increase and they'll make that a little more difficult for them to compete with us.

Okay, great. Thank you.

Thank you.

Thank you. There are no further questions at this time so I would like to turn the call over to Matthew and Michael for closing remarks.

Once again we'd like to thank you very much for your interest in our Company. We continue to look forward to reaching our goals and rewarding all of our shareholders for their investment in our Company. As we enter the spring selling season, I'd like to remind you that whether it's a home improvement project, a cosmetic enhancement to your outdoor living space or simply an investment for your family buy UFPI. Thanks and have a great day.

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect Good day.