UFP Industries Inc (UFPI) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the quarter two 2013 Universal Forest Products Incorporated earnings conference call. My name is Mark, and I will be your operator for today's call.

At this time, all parties are in listen-only mode. We will conduct a question-and-answer session later in the conference. (Operator Instructions)

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

Thank you. Welcome to the Universal Forest Products second-quarter 2013 conference call. Hosting the call today are CEO Matt Missad and CFO Mike Cole. Matt and Mike will offer prepared remarks, and then we will open up the call for questions.

This conference call is available simultaneously and in its entirety to all interested investors and news media through webcast at www.ufpi.com. A replay will also be available at that website through August 16, 2013.

Before I turn the call over to Matt Missad, let me remind you that yesterday's press release and today's 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.

Thanks, Lynn and good morning, everyone. Thank you for joining us.

I hope you are as pleased as we are by the Company's results for the quarter. With sales up nearly 25% over 2012 and healthy earnings increase, we are on our way to meeting our robust growth goals, and it is an exciting time to be here and to be a part of this great workforce and management team.

Many good things happened in the second quarter, some driven by improvements in our markets, better housing starts, and consumers' willingness to invest in more outdoor projects. More, however, was driven by the tireless efforts of our people.

For instance, we worked hard to manage through a challenging lumber market. Lumber prices dropped dramatically during the quarter, but we managed that and still were able to post a 24% increase in sales and a 19% increase in earnings from operations over 2012 numbers. Our earnings per share of $0.79 exceeded the expectations of the Street.

We achieved these results because our people stayed focused on our goals -- growing profitable sales, operating safely and efficiently, and conducting business with integrity. They managed well, they grew sales, they kept an eye on costs. Now, they may not have been on the diamond Tuesday night, but they sure gave an all-star effort in the second quarter.

Together, we're all working hard toward our goal of $3 billion in sales in 2017 and EBITDA percentages consistent with our historical norms. We did well toward those goals in the second quarter, increasing sales by double digits in each of our five markets and growing unit sales in all markets as well.

Just a highlight of the different markets, the retail building materials sales were up 12.9% over the second quarter of 2012. Although April sales to this market were not as good as we anticipated, May and June were much improved. We are pleased with the performance of some of our branded products, including ProWood treated products, and our Dura Color line of products. We are also pleased that we are growing our retail customer base and providing new and better products to meet consumer needs.

In our industrial packaging and components, sales totaled $193.4 million, up 20.6% over the second quarter. Again, not as robust in April, but improved in May and June. Our unit sales were up 5% over the same period in 2012. While sales were softer to existing customers that we might have expected, we continued to add new customers, which helped to drive sales gains, and which indicate continued opportunity in this market.

Manufactured housing sales increased 35.7% over the same period of 2012. Although some customers have chosen to vertically integrate certain product lines, we still were able to grow sales due to the growth of the overall market and through some of our strategies to sell more products for every manufactured home built. That said, we still have room for improvement in parts of our distribution business.

On the residential construction side, we saw tremendous growth. We had a 57.3% increase over the same period of 2012, primarily as a result of an increase in housing starts. We still are not achieving the desired margins in this market and need to stay on top of our costs.

The commercial construction and concrete forming business continues to expand. Our sales were up 56% over the second quarter of 2012. We continue to look at ways to grow in this market and to grow faster, as well as leveraging the capabilities and resources that we bring to it.

Our gross margins unfortunately did decline 1.2% from 2012 due to the falling lumber market and cost creep on certain framing jobs. As I noted, the lumber market declined nearly $98 per 1,000 board feet from week 13 to week 26. In 2011, a similar but not as drastic drop in lumber prices took place during a very similar time period. But in 2013, we were able to reduce the impact of this market decline through inventory control, higher unit sales, and better operating leverage in our facilities.

As we look at our inventories, I wish I had a crystal ball to better predict what the lumber market was going to do. For now, we will continue to watch the market closely and expect modest margin impact to continue if the market stays at its current levels during Q3. Overall, our inventories are slightly higher than I would like them to be, but they are in line with 2012 as a percentage of our current month sales.

On the accounts receivable side, our current accounts receivable are 2 percentage points lower than in 2012, due in large part to an increase in housing-related sales which historically tend to be somewhat slower pay.

Now, I would like to talk a little bit about our performance towards our growth goals. All of our metrics point to more success and also indicate that we have opportunity for improvement. We are on the growth path we set out for our Company.

Our new product focus has brought additional sales of almost $43 million year-to-date in 2013 versus $34 million last year. We are filling our development pipeline, and while we recognize that not all new products will be a home run, we can make a tremendous impact even if we only bat 0.300.

Our international effort is starting to pay off as well, although a bit slower than we would like. We have added manufacturing in Durango, Mexico and Mexico City which should generate another $12 million in annual sales. And, we have added sales efforts in Europe, the Middle East, and Northern Africa to go along with our improving sales in the Caribbean, Central and South America. The combination of our international purchases and sales, not including Canada, is over $100 million, and we need to capitalize on our existing relationships to grow that more rapidly.

We also continue to aggressively search out good partners for ventures or acquisition, both domestically and internationally. We still maintain a valuation approach, which we expect will afford us the ability to earn a fair return on the venture or acquisition, not only for our partners but also for our Company. All of our efforts are focused on meeting our long-term growth objectives and creating a much more valuable Company.

Now, I would like to turn it over to Mike Cole to review some of the key financial statistics for the quarter.

Thanks, Matt. Before I review the financials, I should briefly address the impact of the lumber market this quarter.

As you might recall, lumber markets rose to a peak at the end of March this year and then fell 29% over the next 11 weeks. Conversely in 2012, we were selling into a rising market throughout the second quarter. In recent years, this type of negative sequential trend would adversely impact our profits. We are pleased to say that lost profits from the drop in the lumber market this quarter was more than offset by strong unit sales.

Also, although lumber prices were on a negative sequential trend this quarter, year-over-year lumber prices were up about 15% on average. The higher level of year-over-year lumber prices impacted not only our sales levels but our working capital, cash flow, and ratios like margins.

Starting with our income statement for the quarter, our overall sales increased 24% due to a 15% increase in prices and a 9% increase in unit sales. By market, our sales to the retail market increased 13% which was comprised of an 11% increase in prices and a 2% increase in units. Within this market, sales to our big box customers increased 14% while sales to our other retail customers increased 12%.

Also, the trend line of sales within the quarter has left us feeling optimistic. After a significant decline in unit sales in April, units rebounded to strong increases in May and June.

Our sales to the manufactured housing market increased 36% due to a 22% increase in price and a 14% increase in units. Our unit increase was primarily tied to an 11.5% increase in industry production of HUD code homes. Our unit sales increased slightly more than the market due to our distribution business which has continued to gain market share.

Our sales to the residential construction market increased 15% -- 57% due to a 30% increase in prices and a 27% increase in units due to the continued increase in housing starts again this quarter. By comparison, housing starts increased year-over-year 28% from March through May.

We're also pleased to report that our plants that primarily serve this market had a year-over-year increase in operating profit of approximately $3.0 million this quarter.

Finally, our sales to the industrial market increased 21%, comprised of a 16% increase in pricing and a 5% increase in unit sales due to acquisitions we recently completed.

Moving down the income statement, our second-quarter gross profit as a percentage of sales decreased by 120 basis points, primarily due to the higher level of year-over-year lumber prices. As you might recall, we generally price our products to earn a fixed profit per unit with commodity cost being a pass-through. So in periods of higher year-over-year lumber prices, our gross profit percentage will naturally decline. Taking this into account, a better analysis of our profitability lies in a comparison of the change in our gross profit dollars versus the change in our units shipped.

We're pleased to report that our gross profit dollars increased over 11% this quarter, which compares favorably with our 9% increase in unit sales. The increase on our profitability and profit per unit this quarter, in spite of the significant sequential decline in lumber prices was due to strong unit sales and the operating leverage we have on labor and overhead costs.

Selling, general, and administrative expenses increased by $3.7 million, or 7%. This increase was primarily due to an increase in wages related to higher sales levels and incentive compensation expenses offset by a decline in bad debt expense.

As you may recall, in June last year we reported a $6.9 million net gain on the sale of certain property, plant, and equipment. If we exclude the nonrecurring gain from our prior-year results, our operating profit increased by almost $4.5 million, and our net earnings increased by almost $2.6 million for the quarter.

Moving on to our cash flow statement, our cash flow used in operating activities in 2013 was comprised of net earnings of $22 million and $17 million in non-cash expenses, offset by a $68 million increase in working capital since December. Our investment in working capital has increased primarily due to higher average lumber prices and overall sales levels.

Investing activities include capital expenditures of $21.5 million and amounts spent for previously announced acquisitions totaling over $9 million. Expansionary CapEx associated with new products in our industrial business totaled over $7 million for the year so far. Finally, our operating and investing activities were funded through borrowings under our revolving credit facility which has a remaining availability of $179 million.

With respect to our balance sheet, our total net debt increased to $145 million compared to $68 million a year ago which is again due to the impact of higher lumber prices on inventory and greater sales levels. As we move beyond the peak selling season, we expect that our working capital would decline for the balance of the year, resulting in strong cash flows and a reduction in our seasonal debt levels.

That is all have on the financials, Matt.

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

(Operator Instructions) First question comes from the line of Steve Chercover of DA Davidson.

Hi, Matt. Hi, Mike. It appears that you guys really did manage your inventories really well. Because I, for one, was concerned that you might have been hit with a write-down of some sort. Without revealing your secret sauce, is part of the success just the ability to move it on to job sites so that someone else owns the inventory at the end of the quarter as opposed to you?

I think there is a couple of different things. I think a big part of it is our mix and the fact of the different markets we serve and the different pricing methodologies that we have to our customers. So that does help mitigate some of the impact of the declining market; also tends to cut it somewhat when the market is going the other direction as well. But that balance certainly helps.

I think our guys did a great job of trying to maintain their inventories and not get too far out in front of themselves in terms of their purchases. So I think there is a combination of things, and, again, without revealing any special sauce, I think it really was just a lot of hard work from our people.

The operating leverage had a big impact, too, Steve. If you look at our material costs as a percent of sales, that was down about 70 basis points. But, our labor and overhead cost as a percent of sales had decreased by 110 basis points. Sorry, excuse me, our material costs were up 70 basis points, but our labor and overhead costs were down 110 basis points. So that was why we were able to help mitigate it as well.

It is good to be busy. Or, at least busier. I know that you guys do not really want to gamble on taking big positions one way or the other, but did you feel safe enough starting the third quarter that we might be in for a bounce that, after the page on the calendar turned, you started buying a bit more aggressively?

I think we're still watching the market very, very closely, Steve. We're not really sure what direction it is going to go, whether it is going to follow historical patterns or not. I would say at this point we are still very cautious in how we are approaching the purchasing side.

Okay. And then, switching gears a bit. Any readthrough from yesterday's rather lackluster housing data? Did you see a slowdown in June? I recognize that most of the weakness was on multifamily, and that is not your area of concentration. But just wondering how you are feeling about the summer.

Again, we are following the market. As you all know, we are not in all of the national markets. We are in some pretty good markets. We tend to see more regional results as opposed to national results.

The multifamily is something that has been heated up for quite some time. We will keep our eye on that closely because there does have to be somewhat of a pullback in that over the next 18 to 24 months, we would expect.

Okay. I generally try not to throw roses on these conference calls, but I was nervous. So, good quarter.

Thank you.

Thank you for your question. The next question has come from the line of Robert Kelly of Sidoti.

Hi, Mike and Matt. Good morning.

Good morning, Bob.

Mike, you called out materials were a 70-basis-point drag. Was that on the gross margin?

Correct.

That was offset by labor and overhead which was a 110-basis-point positive?

That is correct.

What was the rest of the drag between what you did a year ago and what you put up in 2Q '13?

I think the lead-in to those two numbers is probably -- since year-over-year lumber prices are higher -- the level of the lumber market is higher -- if you adjust this year's sales to be equal to last year's price levels, that increases gross margin by 160 basis points. Now, what you are left with is adjusted gross margins of about 12.5% versus 12.1% last year.

Really, if you adjust for lumber prices to make them level, we were at 40-basis-point increase in gross margin this quarter. That, and the 40 basis points comes from the operating leverage side.

Got it. Then so -- Matt put it perfectly. No one has a crystal ball. But, based where you are with your inventory, and I believe the comment was made that there would be some a little -- there would be some drag as we entered 3Q or there would be some margin impact, I'm assuming that is a little bit of a drag on the margin from higher lumber costs? Or, how do we think about --?

That is correct, Bob. That is really the way that I look at it. For the next 30 to 45 days, I would expect that to be the case.

That's assuming that lumber kind of flattens out in this -- in the current range that you're at -- [average].

Correct.

Okay, great. As far as the volume growth you saw in big box, that is a number that we have not heard from you in a long time, a double-digit unit gain. What is happening there? Is that just a combination of the March weather, and you had some catch-up? Or are we starting to see DIY turn the corner?

I think earlier in the year, the same store sales results were actually down in units. We have seen a little correction in that in May and June. We also picked up some additional volume which has really helped in all of our customers in that market. That has probably been the bigger driver for us.

We picked up some market share. And, I think improvement in unit sales in May and June. We hope that that continues. But, we do not know that for sure.

Okay. Thanks. And then, just one question maybe and just a point of clarification. Pricing in the residential construction business was up 30%. But lumber, on average, was only up 15%. Can you just help me understand why you did so well on the pricing side in res construction?

Are you comparing, Bob, from earlier in the year?

You had said -- I believe Mike Cole had said that your price was a 30% benefit for the res construction side?

Yes. And, really Bob, that's because, on the residential construction side prices are held for a longer period of time.

Okay.

So if the lumber prices were higher in Q1, those prices are fixed for a period of time. Earlier in the year, in Q1, lumber prices were more than 30% higher year-over-year.

Okay. So, that price tailwind for res construction will moderate in the second half?

Exactly.

Got it. Thanks, guys. Great work.

Thank you for your question. I would now like to turn the call over to Matt Missad for closing remarks.

Again, I would like to thank you for your time this morning. I would also like to thank all the members of the UFP family of companies for their hard work and all of the shareholders for their investment in our Company.

We see lots of opportunity on the horizon, and we will continue to devote our efforts to improving the returns and growing your Company profitably. As you enjoy the outdoors this summer, we will be working to show how the purchase of UFP products can enhance your outdoor living environment and make time spent with family and friends even more enjoyable. Thank you, and have a great day.

Thank you for your participation in today's conference, ladies and gentlemen. That concludes the presentation. You may now disconnect. Please enjoy the rest of your day.