UFP Industries Inc (UFPI) 2014 Q2 法說會逐字稿

A very good day to you, ladies and gentlemen, and welcome to the Q2 2014 Universal Forest Products Inc. earnings conference call. My name is Gary, and I will be your event coordinator today. (Operator Instructions). The conference call will be recorded today, July 17, for audio replay purposes.

I would now like to turn the call over to Lynn Afendoulis, Director of Corporate Communications. Over to you.

Good morning. Welcome to the Universal Forest Products second-quarter 2014 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 our webcast at www.ufpi.com. A replay will also be available at that website through August 17, 2014.

Before I turn the call over to Matt Missad, let remind you that yesterday's press release and today's presentations made by our executives include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause the 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 Matt Missad.

Thank you, Lynn. Good morning, ladies and gentlemen, and welcome to our second-quarter 2014 earnings conference call. We appreciate you joining us this morning and for your interest in our Company. I am grateful for the start of Michigan's six weeks of summer, but I'm even more grateful for the second-quarter performance of our team.

With quarterly earnings per share of $1.08, we beat last year by 37%. Our year-to-date earnings of $1.44 per share also beat last year's by 37%. These improvements show that the efforts of our team to boost profitability are working.

The second quarter also saw our best sales performance since 2006, as we recovered from the slight sales shortfall of the first quarter. Of course, we are never satisfied with our results, and we recognize that improvement is like Jell-O; there is always room for more.

I believe we are on the right track, as we will discuss by walking through our four key business metrics: sales, margin, inventory, and accounts receivable. In the second quarter, sales dollars were up 5%, while units were up 6%. Sales activity was good, and our facilities are experiencing reasonable capacity utilization for this time of year.

The lumber market was relatively flat during the quarter, and the results that we posted are indicative of a flat market. By market, our sales results were as follows: retail was up 10.9% at $349.1 million. Construction was down 4% at $231.6 million. The decline in the market price of OSB was the biggest driver for the decline in sales in this market.

We also reduced sales of framing in our quest to seek better margins in that area. The industrial market was up 5% to $203.5 million. While this increase is good, we should be able to do better in our industrial markets.

Moving on to gross profit, it was up by almost 170 basis points for the quarter overall versus the second quarter of 2013. We believe the stable lumber market during the quarter as well as an increase in value-added sales helped to drive this improvement. And our goal of double-digit profit growth was exceeded during the quarter in spite of slower sales growth.

Inventories as a percent of June sales was 111% versus 111% in 2013. We have still maintained a larger-than-normal safety stock due to continuing transportation problems with obtaining sufficient and timely flatbed transport for our products. On a positive note, the rail issues we faced in the first quarter have improved significantly.

Moving on to accounts receivable, our goal on accounts receivable is to have them 95% current. We currently are at 93% current, and our write-off percentage year to date is 0.104% of sales.

Looking ahead through 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 year to date of $65.8 million, an improvement of 33.7% over 2013.

We will be focusing additional resources and personnel in this area to speed up sales and the products introduced. This number has not yet benefited from sales of our Eotek siding product, which we expect will improve over the next year as we add more products to this group. Our Deckorators and ProWood branded products continue to meet internal sales goals and create more opportunities to expand those product lines, as well.

On the acquisition front, our acquisition growth is yielding positive results, as we closed one more transaction during the second quarter. We are still aggressively pursuing acquisition targets which meet our strategic objectives and help bring talented leaders into the UFP family of companies. We continue to focus on valuation methodologies that permit us to earn a fair return post-transaction. In the meantime, organic growth continues at each of our facilities with available space and market demand. Again, our focus is on improving value-added capabilities.

Our international business development initiative has identified several good potential business partners and continues to create 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 hopefully come to agreement on common ground on valuations to partner with good companies in a foreign market.

We also have many exciting personnel moves in the works to help strengthen and deepen our talent pool. We have appointed two new Executive Vice Presidents in the Eastern division. Patrick Benton is the new Executive Vice President of the North, and Jonathan West is the new Executive Vice President of the South.

These gentlemen are proven, long-term UFP veterans who have previously led some of the best-performing regions in the Company and will bring their energy and skill set to a larger role in the company. In addition, their promotions are creating opportunities for employee growth. It is a very exciting time at Universal, and these moves will help make us bigger, better, faster, and stronger.

Now I would like to turn it over to Mike Cole to talk about some of the financial highlights.

Thanks, Matt. Starting with our income statement for the quarter, our overall sales increased 5% due to a 6% increase in units, offset by a 1% decline in our prices.

By market, we were very pleased to see our sales to the retail market rebound to an 11% increase in unit sales in Q2 after the impact of difficult weather in Q1. Within this market, sales to our big-box customers increased 13%, while sales to our other retail customers increased 8%.

Our sales to the industrial market increased 5%, comprised of a 6% increase in units, offset by a 1% decline in prices. Unit sales growth this quarter was primarily driven by orders from existing customers, which contributed $8.5 million to our sales growth this quarter, while new customers added about $1.5 million to sales.

Overall sales to the construction market decreased 4%, primarily due to sales to our customers that produced factory-built manufactured housing and site-built residential housing. Sales to manufactured housing customers decreased 9%, due to an 8% decline in selling prices combined with a 1% decrease in units shipped. 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.

Our sales price has declined primarily due to a year-over-year decline in OSB prices of about 37%. Sales to residential construction customers decreased by 8% this quarter, comprised of an 11% decrease in units, offset by a 3% increase in prices.

By comparison, national housing starts for the quarter increased about 9% 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 these decisions 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 second-quarter gross profit as a percentage of sales increased by 170 basis points. The increase in our profitability this quarter was driven by four main factors. First, our improvements at our operations that primarily serve residential construction customers and the unit sales growth to the retail market; and a much more favorable lumber market this quarter -- you might recall that last year that we were selling into a falling market throughout all of Q2; mature profitability of products sold on a variable price model; and then an improvement in our product mix toward selling more higher margin value-added products.

Selling, general, and administrative expenses increased by $5.9 million or 11% this quarter. This increase was primarily due to an increase in wages and benefits related to headcount and accrued bonuses and other and incentives tied to profitability.

As noted in our press release, we also recognized a charge totaling $1.6 million consisting of retroactive duty rate increases associated with nails we imported from China. Overall, we are very pleased to report an increase in operating profit of almost $10 million, while our net earnings increased by $6 million.

Moving on to our cash flow statement, our 2014 cash flow from operations improved by $39 million and is comprised of net earnings of about $30 million along with $17 million in non-cash expenses, which was offset by a $37 million increase in working capital since December due to the seasonality of our business. Investing activities include capital expenditures of $20 million, which includes expansionary CapEx of $3 million associated with investments in new products and expanding our capabilities to serve industrial customers. Investing activities also included over $7 million of payments for previously announced acquisitions.

Finally, we borrowed $10 million under our revolving credit facility to support our business in the first six months of the year. At the end of June the facility had almost $245 million in availability. As we move beyond the peak season of our business and working capital begins to decline, we will pay off the balance of our revolver and should build our cash reserves.

Our balance sheet continues to be in great shape, and we believe we could add over $130 million in debt and still feel comfortable with our leverage and capital structure. That's all I have in the financials, Matt.

Thank you very much, Mike. We'd now like to open it up for any questions you may have.

Thank you. (Operator Instructions). Jay McCanless, Sterne Agee.

A couple questions for you. The first one on the SG&A growth -- so that's headcount, that's bonuses; is there any of that that's maybe one-time? And what should we expect for the back half of the year in terms of SG&A levels?

There aren't any significant one-time increases or decreases, Jay. About $3.5 million or so of the $5.9 million increases is bonuses and profitability. And to the extent we continue to have profitability gains like we've seen in the first year, you should see the same sort of trend in the back half of the year.

The balance of the increase is tied to headcount. Most of that's in the sales and design area. So the way we look at it, we are making an investment for future sales growth there. And I would expect that trend to certainly continue for the balance of the year.

Okay. And then on terms of the major manufactured housing customer, can you quantify in revenue terms what the loss of that customer means? And what opportunities do you have to backfill that business with other people in the MH space?

In terms of the revenue portion, Jay, I think it's about $8 million in Q1 -- maybe $6 million, actually, in Q1. And it was about $8 million in Q2.

Yes, and I think with respect to the manufactured housing customer base, we still have tremendous market share with the remaining manufactured housing producers. So while there may be some opportunity to improve, and there still is some opportunity to gain more business, I wouldn't anticipate that there we'll be able to pick up that much volume with the remaining participants in the MH business.

Okay, okay. And then on the retail segment, did you give the actual unit growth there?

Yes. In the retail segment, the unit sales growth was about 11%.

11%, okay. Just an observation, it seems like the commentary in the release and what you said today about especially the big box -- it seems more positive on a relative basis versus what you guys had been saying before. What's going on there? Are you seeing better opportunities to sell into those stores? What is happening with the lumber yards, as well -- the smaller lumber yards, as well?

There's a couple things going on there, Jay. What we're seeing is that both improved repair and remodel demand, which we see helping to drive the big-box retail market. We are also seeing increased penetration into the independent retail market. And the introduction of a lot of our new products and creating some opportunities for us to add value is really helping expand our capabilities with those customers. So to summarize, I would say that overall their market is improving. And also, we are increasing penetration.

Okay. And then just the last question I had: was there any lingering impact from the weather this quarter? We have had -- some of the builders that we talk to say that winter extended all the way into May in certain parts of the US. Was that your experience? Or what, if any, impact do you think there was from the weather in 2Q?

I think in the second quarter there may be some limited impact from the weather, but I wouldn't certainly put any blame on that. One of the things that we did see is there was a pickup from some of the lost business in the first quarter, but we see a labor shortage and a shortage in the construction professionals side of the business. They weren't able to do much in the first quarter, but that doesn't mean there's more of them in the second quarter. So what really happens now is it's a labor crunch issue and a professionals crunch issue; their time is pretty full. So that might be a bigger holdback than weather.

Okay. Great. Thanks, guys.

Steve Chercover.

You probably haven't seen these, because they just came out, but the building statistics were just released. Permits in June, 963,000; starts were 893,000, down 9% from May and up about just from 838,000 last year. Do those numbers, if you can process them, surprise you? And would they change any of your expectations for the second half of the year, I guess especially the permit authorizations?

Yes. I think we tended to be a little more conservative in our forecast. I think what that might change is you'll see on the supply side it may have some impact on the market. Both the lumber market -- as we talked about the OSB market, I think they added capacity in 2013 based on the fact that they were expecting about 1.2 million housing starts this year.

Obviously, to the extent that doesn't materialize, that's going to continue to depress pricing on those types of products. And I also think it will have an impact on the lumber market. But we didn't base our performance results on a high number of starts. So it's disappointing from the economy standpoint, but I don't think it's going to have a big negative effect. But it will hurt the market, the lumber market.

Got you. Okay. And then I wanted to ask you about your $3 billion sales aspirations for 2017. Given that you are on a pace for about $2.6 billion, maybe it is $2.5 billion, given the seasonality this year, and the new products you have in the pipeline, and acquisitions, isn't that really quite conservative?

I hope it is.

I mean, yes, 2017 -- that is three years from now. So it just seemed, almost, you are expecting maybe lower pricing.

Yes, I think, Steve that --

I almost thought that was a typo. I would have thought that would be -- in my model, $3 billion in sales would be 2015, not 2017.

As you know, we don't give guidance. And so I will certainly say that we hope it's a conservative number, and rest assured that we aren't going to stop once we hit that. The goal is to continue to grow.

Well, I hope not. But as a follow-on to that, knowing that you don't give guidance, given some of the changes in your segments and the business mix, can you just remind us what historical operating margins you are shooting for would be?

Sure. If you are looking at EBITDA, that would be between 5% to 6%.

5%, 6%. Got it. And then one last question, also margin related: what type of margins do you need not to fire your customers? Because you walked away from some business.

That is a very slippery slope to try to address on his call. But we have the return targets that you are well aware of; we have a cost of capital, and we have to make sure that our pricing will allow us to earn a return that is equal to our cost of capital.

So suffice to say, as always, you don't do business for practice.

Correct. We don't do businesses for practice. We have plenty of practice in our careers, so we don't need to do any more.

All right. Thanks. I will get back in the queue.

David Fondrie.

Dave Fondrie with Heartland Funds. I wonder if you could -- you mentioned that you were -- well, I'm not sure I'm paraphrasing this correctly, but I think that you were unhappy with your growth in industrial. Could you provide a little color around that? And what do you need to do in order to accelerate that industrial growth? And were there any new customers on the industrial side?

Yes. I guess I wouldn't classify it as unhappy, David. I think we did have solid growth, but we think we can do better. And I think what we are -- as we move further in the design curve to do more high design, high engineered products in a better mix, that's really what we are focused on.

And we continue to try to grow market share. Again, general economy indicates how much growth there is actually within our customer base and how much we have to get through market share gains.

And were there any new customers in the quarter for the industrial side?

There were. There were most almost 100. Amounted to about $1.5 million in sales. So sales per customer is low, but it takes time to develop that. I guess the one thing that I would say is that that's probably a much lower number than we've seen in the last several quarters. So that's something we're very focused on and have put a lot of capital and a lot of people on it. So we expect to grow that at a higher rate in the future.

Okay. And can you describe a little bit about how you go to market there? Do you have a dedicated sales force that is calling on -- effectively cold calling on potential customers, or how do you try to develop that customer base?

Yes, we have a number of different methods to grow that business. But we do have a large, dedicated sales force as well as design and engineering professionals; we are out either through existing customers who weren't growing, and also through the new customers. We use that sales force pretty aggressively.

Terrific. And the last question, if I may: could you talk a little bit about the linearity in the quarter? Was it more back-end weighted? It might be a reflection of the weather? Or perhaps at the front end it was pretty strong because of the very weak first quarter.

I think we were fairly consistent throughout the quarter. And I think the stability in the lumber market certainly creates what we would deem to be more of a normalized lumber market for us. So the results weren't skewed heavily either way; I think they were just pretty consistent throughout.

Great. Thank you very much.

There are no further questions. I would now like to turn the call back over to Matt Missad for any closing comments. Thank you.

So once again, we'd like to thank you for listening this morning and for your interest in our Company. Please rest assured that we will keep driving sales and profit growth, with the ultimate goal of increasing the value of our Company for our shareholders. Have a great day, and happy birthday, Tina.

Thank you very much, ladies and gentlemen. That now concludes your conference call for today. You may now disconnect. Thank you very much.