UFP Industries Inc (UFPI) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2014 Universal Forest Products, Incorporated earnings conference call. My name is Janeda, and I will be your operator for today.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Ms. Lynn Afendoulis, Director of Corporate Communications; please proceed.

Thank you, and welcome to the Universal Forest Products' first-quarter 2014 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 our webcast at www.ufpi.com. A replay will also be available at that website through May 17, 2014.

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.

Thank you, Lynn. Good morning, ladies and gentlemen, and welcome to our first-quarter 2014 earnings conference call. I was very excited to look out the window this morning and see green grass instead of snow. Perhaps Spring has arrived in Michigan.

As you know, the first quarter of the year is very unpredictable for us and others in our business. This year was no exception, but I am proud to note that we delivered the best first quarter since 2006, with earnings per share of $0.36. And we accomplished that in spite of dealing with the equivalent of approximately 80 plant closure days thanks to a Winter that has been like a houseguest who has overstayed his welcome.

During the long Winter, our people bundled up, worked hard and delivered very good results under the circumstances. They were like [Devo's] snowball, rolling through the snow getting bigger and faster, and gaining momentum. They are as motivated as ever, having felt improved success in 2013, and working hard to achieve even better results in 2014.

I believe we are on the right track, as we will discuss as we walk through our four key business metrics: sales, margin, inventory, and accounts receivable. In our first quarter and year to date, sales dollars were up 3/10%, sales activity was good, and our facilities are reporting strong order interest. However, due to excessive plant shutdowns based on weather and the inability of many projects to get started, sales fell short of our goal.

When we factor in the negative impact of the lumber market, we still see positive unit growth in spite of the weather. For the first quarter, the lumber market was 5% lower year over year, and actually today is approximately 20% below the same time in 2013. We are optimistic that we will recover most of the sales that were postponed in the first quarter, but also recognize that availability of installation labor, transportation, and other factors may spread out the time frame to recoup these lost sales.

By market, sales results were as follows: retail was down 1.8% at $202.3 million; construction was down 2.8% at $190 million; and industrial was up 6.7% at $170.4 million. On gross profit -- was up 150 basis points overall. This improvement resulted from improved performance versus 2013, primarily in our framing operations, and also from an increase in value-added product sales.

Our goal of double-digit profit growth was achieved during the quarter. Profit measured by earnings per share was up 38%. This percentage increase is even higher if we adjust 2013 EPS number for the higher effective tax rate we paid in 2014.

Moving on to inventory. Inventory as a percent of sales was 152% versus 143% in 2013. We have about a 10% safety stock at the end of the first quarter. And we are carrying this extra inventory due to market conditions and unpredictable transportation from mills caused by a railcar shortage and long delivery times for many western species. These railcar challenges, many of which were stranded due to weather, are starting to ease somewhat, but they definitely impacted deliveries. We expect these issues to be resolved by the end of Q2, and we plan to return to more normal inventories between now and then.

Moving along to accounts receivable: Our goal on accounts receivable is to have them 95% current. We are currently at 93% current, and working on improving that.

Looking ahead through the balance of 2014 and beyond, I would 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. Our new product development effort continues to grow, with new product sales for the first quarter of $21.2 million, an improvement of almost 13% over 2013. We plan to increase this more this year with additional products being introduced, and improved sales of existing new products for the balance of the year.

We continue to dedicate more marketing and product management resources to drive our key product brands. You will see our first-ever television ads for decorators' deck products and accessories on the popular DIY and HGTV networks, part of a new campaign to continue to enhance that brand. And you will see the results of much-improved design and marketing plans for many of our other brands, as we seek to pull more sales through our customers.

Our acquisition growth is yielding positive results, as we closed three transactions during the first quarter. They were small but strategically important for our local subsidiaries. We still see many opportunities to team up with good companies in our markets.

Organically, we continue to add capacity and improve 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.

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 can find common ground on valuations, to partner with a good company in a foreign market. We maintain our conservative approach, and understand that in order to be successful, a venture must be able to provide an acceptable rate of return on our investment.

We are also managing many other market dynamics as well; for example, labor shortages that affect our ability to hire strong candidates for job in production, sales and management, and that affect the availability of adequate crews for job sites. As we grow, we need to create a deeper bench of talent to continue to improve operating performance. We continue to add sales, technical specialists and management personnel, and to take them through our training and development programs. We will continue to develop and upgrade existing management teams and organizational structures, making sure we have the right people in the right roles. These challenges are just part of the job, and Universal can enhance its competitive advantage by trying to stay ahead of these issues and dealing directly with them when they arise.

Once again, I am pleased with our results this quarter, and more proud of the people who delivered them. The good news is: I know we can do better, which is our goal every day.

Now I would 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 of the lumber market this quarter. Year-over-year lumber prices were down about 5% on average. The lower level of lumber prices impacted not only our sales but our working capital, cash flow, and ratios like margins.

Starting with our income statement for the quarter: Our overall sales remained flat due to a 3% increase in unit sales, offset by a 3% decline in our prices. By market, our sales to the retail market declined 2% due to lumber prices. Within this market, sales to our big-box customers increased 7%, while sales to other retail customers declined 11%, which we believe was primarily weather related.

Sales to the industrial market increased 7%, comprised of a 10% increase in unit sales, offset by a 3% decline in prices. We were very pleased with our unit sales growth this quarter, which reflects adding over 200 new customers and an increase in purchases of existing customers of 7%.

Overall sales to the construction market decreased 3%, comprised of a 3% decline in selling prices and flat unit sales. Within the construction market, our sales to manufactured housing customers decreased 7% due to an 8% decline in selling prices, offset by a 1% increase in units. By comparison, HUD code home production increased about 4% during the quarter. Our unit sales growth trailed the market, primarily due to a vertical integration strategy recently employed by one of our customers.

Finally, our sales to residential construction customers this quarter decreased by 2%. The 2% decline was comprised of a 6% decline in units, offset by a 4% increase in prices. By comparison, national housing starts for the quarter increased about 2% year over year. Our unit sales change trailed the market as a result of being more selective in the business that we take, particularly in our framing operations. As a result of this and certain operational improvements, the profitability of our plants that primarily serve this market improved significantly year over year.

Moving down the income statement, our first-quarter gross profit as a percentage of sales increased by 150 basis points, and our gross profit dollars increased 14%, comparing favorably with our 3% increase in unit sales. The increase in our profitability this quarter was primarily driven by our framing operations and other operations that primarily serve residential construction customers. Our increase in unit sales to industrial customers also contributed to the gross margin and gross profit increase. These improvements were offset somewhat by unfavorable cost variances we experienced as a result of inclement weather and many lost production days in our plants.

SG&A expenses increased by $5.7 million or 12%. This increase was primarily due to an increase in wages and benefits related to headcount, accrued bonuses, and other incentives tied to profitability, and an increase in bad debt expense. I think it is important to note that the majority of our headcount increases were in the area of sales and engineering, which will help us drive future sales growth. Overall, we are very pleased to report that these factors drove a $3.6-million increase in our operating profit this quarter, while our net earnings increased by almost $2 million.

Moving on to our cash flow statement: In 2014, our cash flow used in operating activities improved by $10 million, and is comprised of net earnings of almost $8 million, along with $8 million in non-cash expenses, offset by a $70-million increase in working capital since last March, due to the seasonality of our Business. Our investment in accounts receivable has increased, primarily due to a slight increase in our receivables cycle, while inventory has increased, primarily due to the impact of weather on sales.

Investing activities included capital expenditures of $9 million, including expansionary CapEx of more than $1.2 million associated primarily with investments in new products and expanding our capabilities to serve industrial customers. Investing activities also included $4 million of payments for previously announced acquisitions.

Finally, we borrowed almost $59 million under our revolving credit facility to fund our seasonal working capital requirements. At the end of March, the facility had almost $200 million in availability, after considering letters of credit. Our balance sheet continues to be in great shape, and we believe we could add over $100 million in debt and still feel very comfortable with our leverage and capital structure.

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

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

(Operator Instructions)

Your first question comes from the line of Jay McCanless with Stern Agee, please proceed.

Good morning, everyone. I wanted to ask you first the framing operations that you referenced in the press release would you be willing to let us know what percentage of maybe construction revenues that was in the first-quarter?

And in terms of the higher gross profitability, is that something we should expect to the rest of the year? And would the revenue level on that be similar to what you saw in 1Q?

I think Jay, if you look at it, it was an improvement versus last year. Last year we suffered in that operation and this year it was much better performance.

We would expect that it would be consistent going forward in terms of the performance. In terms of the percentage of the total revenues, I really couldn't give you that. I don't have that information.

Maybe another way to slice that Jay, if I look at the component plants, our component plants increased their sales by a 8%. I think I had mentioned earlier that resident -- overall resident notes from construction decreased by 2%. And that that was comprised of a 6% decline in units and a 4% increase in prices.

If I set aside framing, components plants were up 8%, 4% was prices. And they had a 4% unit increase. So that gives you a sense of how much the framing was actually off.

Absolutely. Great work that is very good color.

The second question I had is, can you give us a little insight into the supply and demand picture into the framing lumber market and what you guys are expecting in terms of sequential improvement or year-over-year improvement or decline in terms of lumber prices through the balance of the year?

I wish I had the good crystal ball for that one, Jay. I think what we are seeing right now, we have had a steady drop since about week 10 in the lumber market. I think the supply issues and the weather -- I hate to keep complaining about the weather, but it is a factor.

I think as it breaks, we noticed in the areas of the country where the weather has been decent, the volumes have been good. In the northern part of the country where the weather hasn't been good, there hasn't been expected take away. That comes around, the demand really moves the needle on the market and it certainly will stabilize it.

And then my last question, just housekeeping. Are there any -- would be three acquisitions that I think you have done over the last couple of months, are there any SG&A costs or one-time costs we need to build into our model for the rest of the year, or are all of those costs captured in the 1Q numbers?

No, they are all captured in the 1Q numbers.

Thanks.

Robert Kelly, Sidoti.

Good morning, everybody. Question on, you called the bad weather being a drag. Anyway to quantify either the cost or the lost sales due to adverse weather in 1Q.

The sales part of it was pretty tough. I am not sure I have a great answer for you on that, except to say we look -- at lease the retail part of it, when I look at the independent retailers -- I think I mentioned the sales to them were down 11%. I would expect them to be up 9% or 10% just for the quarter versus down 11%. That to me speaks of weather.

And then I guess the cost side of it is maybe a little bit easier to quantify though. I mentioned we had adverse costs, variances we track actual versus standard cost. We had negative costs for instance about $1.7 million this quarter While we can't prove that all of that was weather, I would guess the vast majority would be weather related.

Okay, that's helpful, thanks. As far as the independent retailer discussion. Have trends picked up more in line with that +9, 10% expectation in March and April?

I don't know if I can answer that, Bob. I certainly haven't broken it down. We are -- have received over all improved sales here more recently kind of consistent with what we expect.

Okay, so there is some weight to the fact that weather held back activity in 1Q 2014.

Absolutely.

We actually have color to that. In places where the weather has broke sales have improved.

Okay, fair enough. Question on the safety stock that you built. Is the average price of inventory that you are carrying coming out of 1Q at the market? Similar to market levels?

Yes, we are very comfortable with our current inventory carrying values.

Okay. And then just -- I know that you mentioned the crystal ball earlier. If lumber prices were to kind of stabilize at these levels, you'd be relatively in line with lumber prices on average from a year ago. I know there was a lot more volatility in Q2 of 2013.

Assuming lumber is stable, I am trying to get a sense of what the levers -- to gross margin would be in 2014 given the new product expansion, the fact that you are seeing some life in the retail channel. Industrial a strong. How do we think about gross margin expansion in a stable lumber environment?

Yes, I think as you try to put it into perspective, if we can have a stable lumber market then we will be based on just our operating efficiencies and then I think you will see something more along what we see in a historical market for us. Last year, I think we had a market decline in the second-quarter of 2013.

It is starting to trend that way right now. Is that is able to reverse, then we should see a better picture. I can't give you a whole lot more color than not but you can probably infer from where the market goes as to what the impact will be.

Okay. Understood. This is more of a longer-term question. You have talked about the 2017 sales goal of $3 billion.

I think that is indexed to a much lower lumber price. And then last call you referenced a return to 4% to 6% of margins under a normalized demand conditions. What are the assumptions you built into, from a macro perspective to get to those, whether it be unit or sales levels. And of course on the EBITDA margin.

I think from a housing start perspective which is an indication not just of construction activity but also general economic health, we had built in a $1.5 million housing start number. We also look for relative stability in the lumber markets, not big wild swings in it. It generally stabled labor and cash situation. Those are some of the major drivers that we consider as part of our program.

And as you -- one of the other drivers that you referred to, Bob, was the lumber market. We used the 2012 lumber market is part of our forecast. I think in 2013 we finished with EBITDA percentage of sales up 4.5%. I think we normalize that for lumber prices in 2012. Knowing how we price our products, we are actually at about 5% EBITDA margin last year. So we are making great progress on the goal.

Great color there. Just one final one on the price, improved pricing or even competitive pressures particularly in the framing operations that is something that is relatively new, it seems. Is a matter of being able to walk away from or issue really lower margin projects or is pricing overall from your competitors firming up with some line of sight for demand really turning the quarter.

I would say it is a combination of both of those factors, plus just an improved on-the-job performance as well. I think the market has definitely firmed up. The availability of labor has created some of that.

Our internal policy of not working for practice is certainly being followed. I think all of those factors have helped drive the improvement.

Sure. I guess -- you kind of called that +4% on pricing and I think the rest on construction unit. Is that really a function of just rolling out of or completing some low-margin work or is that reflecting real-time pricing?

Again, I would say it is a combination.

Will -- (multiple speakers), thanks, guys.

Thank you.

Steve Chercover DA Davidson and Company.

Good morning. I wanted to talk about the loss production as well. You lost 80 days. How many theoretical production days do you have? Do your plants work on weekends, for instance?

Some of them do, especially during times of the year, they are working almost 24-7 in some cases. In terms of over all, within the first-quarter most of the facilities are not working weekends yet. The impact is pretty significant of the 80 days.

What I was trying to get at I suppose is an operating rate. Can you frame it that way? Was operating at 85% where it is normally at 95%? Give us some content.

I think, Steve, I see what you are trying to get to. It is a tough one to quantify that way just because there are so many different locations and they are doing some many different things, operating at so many different rates.

So if I try to give a number on that cost variances that kind of a global number. What I would typically do is look at that $1.7 million and negative cost variances assume a very high percentage of it was weather related. Then what we would do is subtract taxes and bonuses and translated into a net earnings number -- and EPS number of $0.04 to $0.05 per share.

Got it. Switching gears. What niches are your new products targeting? Is this just more decking materials? What are you going for?

Actually Steve, what we are trying to do is improve each one of our product categories. It will be in each of our markets. Some are obviously easier to address than others. But the challenge for all of our operations is to develop new products and to improve existing product lines. We are seeing it across a broad spectrum of our operations and our product lines and we're going to continue to expand that. So it is not limited to just one category.

What prompted the change in segment presentation?

I think, as we look at it, we try to combine areas to basically make it easier to understand. We know we are a confusing diverse company when we talk about it with investors. We have construction market people want to look at housing starts and say, you are all housing starts revenue. That is true for parts of our business.

But it is not true for other parts of our business like the industrial and or retail. What we try to do is create a situation which makes it easier for the investment community to look at us and say, I get it, the residential housing start number ties in much better with construction market. We look at retail and that is more of a repair and remodel and we look at industrial and that tends to be industrial out put or industrial activity. We are tying to make it a little easier to understand.

Got It. Last question. Sales and independence -- is it your impression that they operate in a just-in-time basis. I would think it would be and inventory build going in the Spring because we know sooner or later the weather is going to break. Do you have a sense?

Yes, I guess our view on that is they are more apt to buy on a just-in-time basis and less apt to go through that inventory build versus the big box just as an example.

(multiple speakers) The big box has their own distribution networks as well where as most of the independents do not. So we are their distribution point. We are carrying inventory for them in most cases.

So be big boxes were up in the quarter. So we can assume their inventory levels are appropriate but since the independents didn't buy presumably -- there is going to be some pent-up demand there.

Yes, that's what we believe.

Thank you very much.

Thank you.

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.

Once again, thank you for listening this morning and for your interest in our company. We are all hoping for blue skies and sunshine or at the very least dry weather with temperatures above 50°. Please have a great day and good luck on the Easter egg hunt.

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