UFP Industries Inc (UFPI) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fourth-quarter 2013 Universal Forest Products earnings conference call. My name is Dave I will be your operator for today. (Operator Instructions).

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

Thank you, and welcome to the Universal Forest Products fourth-quarter 2013 conference call. Hosting the call today are CEO Matt Missad and CFO Mike Cole. Matt and Mike will offer prepared remarks then 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 our webcast at www.UFPI.com. A replay will also be available at that website.

Before I turn the call over to Matt Missad led to 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.

Thank you, Lynn. Good morning, ladies and gentlemen, and welcome to our fourth-quarter 2013 earnings conference call.

I will start by saying, wow, what a great quarter. Although it is my privilege every day to work with the great people of UFP, this day is especially gratifying.

The team posted awesome results for the fourth quarter which not only surprised the street but exceeded our internal expectations as well. We knew this performance was possible and many things aligned to create the great results. One of those things was our ability to generate weekly profits well into December which is unusual given our historical seasonality.

I'll start by walking through the four keys to our business -- sales, margin, inventory and accounts receivable. Our sales growth was solid. Overall sales increased $64 million for the quarter and nearly $416 million for the year versus 2012.

By market, retail sales increased $10 million for the quarter and $100 million for the year. We noted that the repair and remodel market was steady during 2013 and our customers are predicting that it will remain steady in 2014.

The construction market was $203.3 million for the quarter up $25 million over 2012. For the year 2013, sales were at $865.6 million, an increase of $206 million from 2012. Housing start predictions for 2014 ranged from 1 million to 1.2 million units and we will continue to position ourselves at the conservative end of this spectrum.

On the industrial sales front our industrial sales grew $20 million over the fourth quarter of 2012. For the year, industrial sales were $701.7 million, an increase of $112 million over 2012.

We continue to add new customers in this market and still have ample opportunities for market share growth. The exceptional sales growth in 2013 positions us very well to meet our 2017 sales goal of $3 billion but rest assured that when we hit our $3 billion goal we won't rest, we will continue to set the bar higher to ensure great long-term value for our shareholders.

The next metric to talk about is gross profit. We reported gross profit improvement of more than $20 million for the fourth quarter and $55 million for the year versus 2012. Gross margin increased nearly 3 percentage points in the fourth quarter as we benefited from steady volume, a steadily rising lumber market and increased capacity utilization in our operations.

Our long-term goal of getting our operating margins to our normal historical levels of between 4% and 6% requires us to continue to improve gross margin. Our emphasis on new products and a better mix of value-added versus commodity products will help us achieve that goal.

As we look at inventory we have an increase of $40 million over a year ago. While some of the increase is due to the market price most of the increase is due to anticipated customer demand for our end products as well as a higher level of safety stock to protect us from potential shortages which we have seen in the marketplace. The lumber market itself remains at a high level and is predicted to remain high for the near term driven both by production limitations and by foreign demand.

Our final metric is accounts receivable. As you would expect accounts receivable is up $17 million from 2012 but it is in line with the higher sales volume.

The higher lumber market coupled with growth has caused many of our customers to bump up against their credit limits. We continue to work with those customers to help supply their product needs while avoiding unacceptable credit risk.

Looking ahead through 2014 and beyond I'd now like to touch briefly on our strategic growth initiatives including new product development and sales, organic and acquisition sales growth and expansion in international markets. We are encouraged by our new product development efforts. In 2013 we spent over $10 million in research, product, brand and market development.

We are investing in our brand portfolio especially our Deckorators and ProWood brands and have enhanced our infrastructure of product development and product management to better fill the new product pipeline and to make sure we have properly launched products in the marketplace. We recognize that building and enhancing our intellectual property assets will drive more new product sales and improve our margins.

This increased investment continues to deliver better results. In fact, during 2013 we achieved over $85 million in new product sales versus $53 million in 2012. This 60% increase is good yet we expect more and look to grow this to $250 million annually within five years.

We also continue to look at different opportunities in our non-wood product lines as the markets for those products continue to evolve and have expanded the test marketing of our non-wood siding products, EOTech in the target market in the East. We will begin distribution in the second quarter which will also include a target market in the Pacific Northwest.

Our acquisition and organic growth will need to expand at a faster rate in order to hit our targets. We continue to pursue several good acquisition opportunities and as typically the case, there are valuation challenges.

We have targeted expansion opportunities in our retail and industrial markets as well as consolidation and capacity enhancements in our existing construction market. Our organic growth continues to add capacity and improved value-added production capabilities at most of our facilities. We are building our team to make sure we have enough talented individuals to support our growth plan and we are beefing up our employee development efforts to ensure we maintain the best, most prepared and knowledgeable team in the industry.

Our international business development initiative has identified several good potential business partners and has created more purchasing and sales opportunities for our existing North American-based operations. We expect to add another $25 million in international sales and purchases in 2014 and if we find common ground on valuations to complete an international joint venture. We will maintain our conservative approach and understand that in order to be successful a venture must be able to provide an acceptable return on our investment.

Our cautious optimism for 2014 is based on a relatively stable economy for the US. It appears that the Federal Reserve will continue the monetary policy which should keep interest rates low for the year and we believe political self-preservation will encourage maintenance of the status quo. Both of these factors should aid us this year.

We are also seeing increased costs due to the unprecedented regulatory activity which affects everything from health care to transportation and from financing to SEC reporting. Our staff is doing a great job of trying to keep up with these regulations but it would be nice to have a reprieve from the unduly burdensome rulemaking.

Since there probably isn't anyone on the call who can fix that problem, we will simply focus on things we can control such as driving our business and executing our strategic plan. And we are confident that we will be successful in achieving our goals. Now I'd like to turn it over to Mike Cole to address some of the financial results.

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

Year-over-year lumber prices were up about 11.5% on average. The higher level of lumber prices impacted not only are sales levels but our working capital, cash flow and ratios like margins.

Starting with our income statement for the quarter, our overall sales increased 12% due to a 7% increase in prices and a 5% increase in unit sales. By market, our sales to the retail market increased 7%, which is primarily comprised of an increase in selling prices.

Within this market sales to our big box customers increased 4% while sales to other retail customers increased 9% as we continue to focus on gaining share with independent retailers. Within construction our sales to the manufactured housing market increased 10% due to an increase in units while selling prices remained flat. Our unit increase was primarily tied to a 15% increase in industry production of HUD-code homes while modular home production increased slightly.

Our sales to the residential construction market only increase by 10% this quarter due to a decline in revenues of our turnkey framing business which offset a 35% increase in sales out of our plants the manufacture engineered wood components. Unit sales out of components plants increased approximately 18%. By comparison national housing starts for the quarter increased approximately 12% year-over-year.

We are also pleased to report that our plants that primarily serve this market had a substantial increase in operating profit again this quarter. Finally, our sales for the industrial market increased 14% comprised of a 4% increase in pricing and a 10% increase in unit sales which is the strongest gain in organic unit sales we've seen this year, as our new customer count continued to increase and orders from existing customers improved.

Moving down the income statement, our fourth-quarter gross profit percentage of sales increased by 280 basis points and our gross profit dollars increased 46% comparing favorably with our 5% increase in unit sales. The increase in our profitability and profit per unit was due to a handful of factors including prospective inventory positioning which allowed us to lower our material costs as a percentage of sales, being very selective in the business that we take particularly related to sales to the residential construction market, and strong unit sales and the operating leverage we have on labor and overhead costs.

Selling, general and administrative expenses increased by $5.2 million, or 12%. The increase is primarily due to an increase in wages, accrued bonuses and sales incentives tied to profitability.

Excluding accrued bonuses and sales incentives SG&A was up about $1.4 million or only 3% this quarter. Overall we are very pleased to report these factors drove a $14.7 million increase in our operating profit this quarter while our net earnings increased by almost $10 million.

Moving on to our cash flow statement, the cash flow from operating activity for 2013 increased by $59 million and is comprised of net earnings of $46 million and $40 million of non-cash expenses offset by a $32 million increase in working capital since last December. Our investment in working capital has increased primarily due to higher sales volume and a higher lumber market both of which have required a greater investment in receivables and inventory.

Investing activities include the capital expenditures of about $40 million including expansionary CapEx of more than $11 million associated primarily with investments in new products and expanding our capacity to serve industrial customers. Investing activities also included an $11.5 million of payments for previously announced acquisitions.

Finally we used the remaining cash flow and available cash to pay off the balance on our revolving credit facility and to pay dividends. The revolving credit facility has $255 million in availability after considering letters of credit.

With respect to our balance sheet, our total net debt decreased to $85 million compared to $88 million a year ago. We are very pleased with the condition of our balance sheet and feel we have incremental debt capacity of over $120 million based on our capital structure and EBITDA, which can be used to support future growth objectives. That's all I have on the financials, Matt.

Thanks very much, Mike. We'd now like to open it up for any questions that you might have.

(Operator Instructions). Jay McCanless, Stern Agee.

Congrats on the good quarter. So first question, a weather report, what impact have you seen thus far in the first quarter and how should we be thinking about our models?

Jay, I am trying to learn my lesson by not being a weather forecaster. Obviously it is fairly easy for everyone to see what is going on out there and what we believe is certainly it's going to slow some of the activity for the quarter but we believe we will be able to make it up through the course of the year.

Okay. Secondly, diesel prices. We've seen diesel be down year-over-year for most of the quarter. What impact does that have on your financials and especially as it relates to your gross margin?

I think there's probably a couple of complicating factors. There's not a real simple answer to that because of how we do our transportation.

Some of it is FOB at the customer location, some of it is delivered pricing, so there's going to be a little bit of a different impact. Obviously from a costing standpoint overall the fuel cost helps us but the percentage that actually falls to the bottom line I couldn't really give you a good answer on that, Jay.

Okay. I did want to ask on the SG&A, I think that in our model that was really the only wrinkle in the quarter was the SG&A as a percentage of sales, it was a little bit higher than we expected. Are you to expecting a little bit higher SG&A rate in 2014 than what you saw in 2013? If you could talk about that please?

I think probably the bigger driver there, as Mike said, was incentive compensation and so we would expect that to be somewhat normal. We did have a larger investment in research and development, product development, product management and those categories. We expect that to continue but we expect it to be a smaller percentage of our sales going forward.

Okay. And then the last question I have, there's a couple of companies out this morning talking about OSB pricing being down almost 20% per year on their realized pricing. What impact do lower prices in the OSB and the structural market have on Universal's results?

I think again, most of what we are talking about in OSB is going to be pass-through type pricing at some point, so it might have temporary shifts up or down depending on price changes, price fluctuation. But by and large it is not going to have a big impact on overall dollars. It might have a margin impact at a lower price point for OSB, the actual margin percentage might be higher given fixed adders and certain product lines.

Okay. But is it safe to say that it should have less of an impact in the framing market and the lumber composite that you guys talked about in the press release?

Yes, it will certainly have less of an impact there and it will have much less of an impact with us than it would for the primary producers.

Okay, great. Congrats again. Thanks, guys.

Robert Kelly, Sidoti.

If you would could you just repeat what you said about the big box units and the other, I'm sorry maybe not units in the sales, and the other customers in the retail market? I think you said big box up 4% and the other was up 9%, is that correct?

Correct.

Is that inclusive of selling price increases?

Yes, that's not units, that was total sales dollars.

So, remodel was pretty strong in 3Q, it decelerated somewhat in 4Q. What is the outlook for volumes for 2014?

I know you talked about kind of steady demand as your outlook but you have heard more optimistic comments from some of your peers. What are your customers telling you for 2014 retail?

I think our customers generally are optimistic about it. Again we take our conservative lens and look at it that way so we prepare for a conservative approach.

If it is better than that we're going to definitely do much better. So we think it will be relatively steady with 2013, obviously a little slower start here in the first quarter but we expect that to pick up.

Okay. As far as the residential business, if you would, if you could, isolate the components business. You've done a lot of work in residential to get the margins right and then kind of shrink your footprint.

Could you give us some sort of idea of where you are particularly in the components profitability compared to where you were in 2005, 2006? Really just want to get a sense of how much more volume you need to kind of realize what you are doing during a good market.

It's a delicate tightrope you're asking us to walk there since we don't give margins by market segment let alone by product line. But I think overall if we were to look at it what we are seeing is we get much better capacity utilization in our facilities. There still is excess capacity in many markets but what we are finding is the realizable capacity we are utilizing a great deal of it right now, which is really helping on the operating leverage side and obviously putting more on the bottom line.

Sure. And then has the price discipline shored up in those markets as well?

Yes, I think what it is enabled us to do is to be selective in the type of business that we are willing to take. And we've said before that we don't want to work for practice and I think our team is doing a great job of not doing that.

Okay. The question on the goal for five years out, $250 million in new products. Is that an organic assumption or do you count M&A or future M&A in that goal?

We will count all new products regardless of how they come to us. Some of it might be purchasing late-stage technology that is ready to be marketed, others may include internally developed items as well. So it's an all-encompassing goal for us.

Okay. Great. On the gross margin line, I know lumber is what it is and it's tough to forecast the future, but in theory, if lumber is steady for a 12-month period, the math is pretty much your gross profit is going to grow instep or maybe slightly better than your volume growth.

That is kind of what you have told us in the past. Is there any added benefit to increasing utilization at this point, which would drive that operating leverage up? And again I am asking if you just kind of assume that lumber is not making any adverse or positive effects on the margin line.

Maybe you can help me with the utilization. Are you talking about facility utilization or some other utilization?

Capacity utilization.

I think in large part there are certain of our markets we are near capacity particularly in the construction side. There still is a lot of capacity utilization that is available for us in other markets.

So I think you are right, there is some room there. As we bump up against the $3 billion sales number I think we're going to start hitting more peak capacity-type numbers, so we will have to expand capacity at that point.

And then to do that do you do it, do you tap your unborrowed credit lines or can you facilitate that kind of spend through just operating cash flow?

We think we'll generate enough operating cash flow to cover that expansion need.

Excellent. Thanks, guys. Have a good one.

Thank you. There are no further question for you now gentlemen. So I'd now like to turn the call back to Matt Missad for closing remarks.

Once again thank you for listening this morning and for your interest in our Company. I'm sure that all of us in the North as well as many of you in the South anxiously await warmer weather and less snow and ice.

But until that happens we will keep a sunny disposition and exert our energies towards improving your Company. Thanks again and have a great day.

Thank you for your participation in today's conference. This concludes the presentation.

You may now disconnect. Have a great day.