UFP Industries Inc (UFPI) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2014 Universal Forest Products, Inc. earnings conference call. My name is Mark, 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 call over to your host for today, Lynn Afendoulis. Please proceed, ma'am.

Good morning, and welcome to the Universal Forest Products Incorporated fourth-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'll open up the call for questions. This conference call is available simultaneously and in its entirety to all (technical difficulty) and interested investors and news media through a webcast at www.UFPI.com. The replay will also be available at that website for the next month.

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 will 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, and good morning, ladies and gentlemen. I wanted to thank you very much for taking the time to join us on our fourth-quarter 2014 conference call. I want to start out the call by saying congratulations and thank you to the employees of the family of Universal companies who posted the best results since 2006.

I would also like to wish Universal Forest Products a happy 60th birthday. What began as a lumber wholesaler in February of 1955 continues to become stronger today thanks to the foundation built by the founders and previous leaders of our Company. They provided a great springboard to grow from, and their fundamental approach to business was one of the training lessons which helped us lead dramatically improved results in 2014.

And as good as the performance was in 2014, we know we must be better in 2015 and beyond. But before I gaze too much into the future, let's do a quick review of our key indicators for our 2014 performance.

Starting with sales, sales for the fourth quarter were up nearly 18% to $628 million. Each market shows positive sales growth. Retail was up 22%, construction up 10%, and industrial up 24%. For the year 2014, sales were up 8% in spite of a very slow start to the year when first-quarter sales were flat compared with 2013. The increase for the last three quarters of 2014 was 10% better than 2013, with growth accelerating through Q4. Overall for the year, retail sales were up 10%, construction was up 2%, and industrial was up 12%.

Our gross profit dollars were up $8.5 million for the quarter, a 13.3% increase, and up $44.8 million for the year, an increase of 16%. Gross margin, however, declined for the fourth quarter to 11.7%, due in part to additional R&D expenses for new products and product changeover costs in our composite decking program to help position us for 2015. Early winter weather in November also caused many production inefficiencies which impacted margins.

Overall, EBITDA margins for the quarter were 4.5% and for the year were 5.2%. Our objective is for EBITDA margins to range between 5% and 6% of sales, and we achieved the low end of that range in 2014.

Our other metrics, we look at on a current basis rather than at year end. Currently, our accounts receivable are 88.7% current, which is an improvement from last year at this time of 84%. But we still have significant room to improve here.

Our inventories are up from year end in anticipation of a heavy spring selling season and due to positioned purchases related to certain fixed-price contracts. As we look at the lumber market, prices for Southern yellow pine are very close to last year's level, while the composite lumber index is about $40 per thousand board foot lower than last year. The market will be impacted by housing starts, mill production, and foreign purchases of North American logs and dressed lumber. Based on what we hear in the marketplace, the market pricing should not be significantly different than last year, but that is always difficult to predict.

Panel products, specifically OSB, remain at low price levels and will need either production shutdowns or curtailments or sizable increases in housing starts to alleviate the oversupply situation.

Now I would like to review some of our strategic priorities for 2015 and beyond.

Our new product sales initiative continues to gain traction. For 2014, our new product sales reached $149 million without much help from our Eotek technology, which has launched industrial products but has not generated much volume yet in the traditional buildings products. With two new distributors taking the product to market this year, we were looking for dramatically improved volumes in the building products area.

With the numerous additional new products we will launch this year, we expect to achieve nearly $190 million in new product sales in 2015. That should put as well within reach of our goal of $250 million in annual new product sales by the end of 2017.

Personnel is our next key area, and it's always a strategic priority for us. We continue to build our team and have gained many great employees through our recent acquisitions. In addition, our homegrown talent continues to tackle new challenges. Due to our extensive training, we have been able to promote numerous of our talented managers to general manager positions and operating vice president positions, and that will help us manage the aggressive growth plans and to accelerate more talent development. We are aggressively recruiting new talent to ensure proper depth in succession planning. While it is difficult to find hard-working and talented individuals, we know that that is a key to our future success, and we certainly welcome any referrals you send our way.

Wages and benefits continue to rise, as Michael described, and we have incurred additional non-value-added employment costs and regulatory charges including an estimated $2 million annually for costs related to the so-called Affordable Care Act and its related regulations. However, we remain very confident our team is the best in industry, and we will overcome these challenges.

On the acquisition front, we were able to close on 5 acquisitions in 2014, which we expect will add well over a combined $100 million in sales in 2015. We continue to look for targets which meet our needs to expand geographically and with more value-added products and services. We have added 2 new companies already in 2015 as well. And we expect to gain synergies from the new capabilities of all of the companies we have required.

On the international front, one of the companies we acquired in 2015 was Integra Packaging in Brisbane, Australia. Integra is in industrial timber packaging and alternative material supplier to original equipment manufacturers and shippers in Australia. We look to capitalize on the multi-national customers operating in North America and Australia to grow our businesses in both of these markets. We will continue our search for good partners globally, but we will avoid permanent investment in countries where current geopolitical conditions make operating a successful business very difficult. Russia and the Middle East are prime examples, and unfortunately Brazil has been trending in the wrong direction as well.

Many of you are probably aware of the transportation challenges in our country from the problems at the ports on the West Coast to lack of available equipment and drivers in the trucking industry. While fuel prices for diesel have seen a small decline, the potential savings is being offset by driver costs, new equipment regulations, and lack of available and competitively priced third-party resources. Fortunately, our transportation company continues to get the job done in some tough market conditions, and we expect them to ensure our customers will receive their products on time.

As you can tell, we are very excited about our prospects going forward and have great enthusiasm for our team. With our growth initiatives, our new products and services, our growth via acquisition and organically, we are confident we will continue to grow our sales at a rate of 4 to 6 percentage points above positive US GDP growth over the next several years. With a still fragile economy, we still need a broader recovery to help us achieve these long-term targets.

Now I would like to turn it over to Mike Cole, our Chief Financial Officer, to review in more detail our financial performance and conditions.

Thanks, Matt. Before reviewing the financials I should briefly just the impact of the lumber market this quarter. Overall lumber prices were down almost 4%. The prices for Southern yellow pine, which is a high percentage of our volume, were up almost 10% for the quarter and drove an overall increase in our selling prices. Now we will move on to some income statement highlights.

Overall sales for the quarter increased 18% due to a 14% increase in unit sales combined with a 4% increase in prices. By market, sales to the retail market increased 22%, driven by an 18% increase in units. Unit sales increased primarily due to improved consumer demand. We had strong sales growth to each of our big-box customers, which collectively grew by 25% this quarter, while sales to our other retail customers increased 19%.

Our sales to the industrial market increased 24%, which included an 18% increase in unit sales. Recently, completed acquisitions drove about 6% of our unit increase, while the remaining 12% unit growth was primarily driven by better demand and gaining share with existing customers. Our overall sales to the construction market increased 10%, consisting of a 7% increase in unit sales and a 3% increase in prices. Our greatest unit sales growth continues to be experienced with customers that buy concrete forms as we continue to gain share. Our unit sales to manufactured housing and residential customers increased by 3% and 4% respectively. By comparison, HUD code home production increased by about 5% for the quarter, and year-over-year national housing starts increased by about 8%.

Moving down the income statement, our fourth-quarter gross profit increased by 13% but dropped by 50 basis points as a percent of sales. This decline in gross margin was due to an increase in unfavorable cost variances we experienced at many of our locations, which was primarily weather-related and hurt productivity.

SG&A expenses increased by $6.9 million, or 14%, due to a $5.1 million increase in wages and benefits primarily related to new operations and headcount and a $1.7 million increase in incentive compensation tied to profitability. Overall, we are very pleased to report a 16% increase in our earnings this quarter.

Moving on to our cash flow statement, our cash flow from operations improved by $19 million for the year and was comprised of net earnings and non-cash expenses totaling about $101 million, offset by a $28 million increase in working capital due to our growth for the quarter and anticipated growth into 2015.

Investing activities included capital expenditures of about $45 million including expansionary CapEx of $9 million primarily associated with investments in new products and expanding our capacity and capabilities to serve industrial customers. Investing activities also included about $35 million of payments for previously announced acquisitions.

Finally, cash flow from operating -- from financing activities included $17 million related to dividends and repurchases of our stock, which we plan to continue into 2015.

With respect to our balance sheet, at the end of December our revolving credit facility had over $271 million in availability after considering letters of credit. 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 on the financials, Matt.

Thank you, Mike. Now I would like to open it up for questions.

(Operator Instructions) Steve Chercover, DA Davidson.

So you say you have got loftier goals for 2015. Can you be specific? You don't need to be too granular -- just sales, gross margin, and EPS.

(laughter) Well, as soon as we decide to give guidance, Steve, you'll be the first among many to know.

Okay. But seriously, you said sales should grow 4% to 6% above GDP, and your target EBITDA margin is 5% to 6% of sales?

Correct.

And do you have a GDP growth assumption?

We think it will be somewhere between 2% and 3%.

That sounds reasonable. Okay, and then you said $190 million of new product sales will be achieved this year. Is that a run rate, or you will get that?

Well, that is our goal for this year. We will have that for annual new product sales in 2015.

We did $149 million last year, so it's about $50 million in growth this year.

Okay. And what are those products?

There's probably about 79 different products, and we will probably be adding over 50 additional ones this year. They range all across the spectrum of our markets. It can be anywhere from retail building material type items to industrial products to products for the construction market.

They tend to be things that you fabricate or add value to, or are they sourced elsewhere?

It's both, but the ones that we're really trying to focus on are things that we add value to.

And then last year we had the polar vortex. It seems like you guys are getting some pretty harsh weather now. We'll be hearing about that on the Q1 call, or is this just pretty well a normal winter?

Yes, I guess so far -- I've learned not to make weather predictions, Steve. So I think the whole idea is right now it's certainly manageable situation. It depends on what happens over the next six weeks or so.

Yes. So it just sounds like, with the exception of maybe Boston then up into Maine, it's just winter. It's cold. You (multiple speakers) a few delays every day or every quarter.

Correct.

All right. That's all I've got. Thank you.

Jay McCanless, Sterne Agee.

Okay, so the first question on the gross margin, I missed. I think you said you guys were talking about stocking program for composite lumber. But then also there was some weather impact on gross margin. Could you reconcile those two? And if you pull the weather stuff out of it, what should the gross margin have looked like?

I think I'd just look at it in aggregate, Jay. There's about $3 million or so in additional unfavorable cost variances for the quarter which are due to a lot of different factors; the ones that Matt had mentioned earlier in the call and weather are the biggest.

Okay. About $3 million in cost variances. Okay. And then second question, on the big unit sales gain to the big-box retailers, is that -- is the majority of that just an easy comp because of the weather last year, or is it the retailers are actually taking more product and stocking deeper? And then the second part of that question is are you guys actually gaining shelf space at some of the big-box retailers?

Yes, just from a high-level standpoint, Jay, I think what we're seeing, the big boxes did better last year. Their year-over-year comps for our products were better than they were. So that's a big part of it. And obviously we are continuing to try to pick up share overall. So we expect that trend to continue.

Okay. And in terms of weather comparisons this year versus last year, do you think any of that was -- any of the -- was at 24% increase in unit sales to the retail segment -- or excuse me, 18% gain? Was any of that just a weather comp?

Yes, some of it certainly could have been, but I don't think there's a big portion of that. We are referring right now to the fourth quarter of 2014 versus the fourth quarter of 2013. Right?

Right.

Yes, I think the weather comp issues will be different for the first quarter. We don't -- can't really predict that yet.

Got it. Okay. And then on the HUD code side, are you seeing any new entrance into that market? New customers? And is the impact of the customer or the financial impact from the customer who decided to vertically integrate some of their operations, is that pretty much done now?

Yes, that -- the second question -- the answer to the second question is, yes, that's pretty well baked in now. The first part of the question, we did have one customer that actually added capacity, opened up in a previously shuttered facility, but there's not a ton of that going on that we can tell.

Okay, great. Thanks, guys.

I would now like to hand it over to Matt Missad for closing remarks.

Thank you. As you can tell, we have a very strong balance sheet. We have a diversified capital plan which balances short-term and long-term shareholder returns through dividends and buyback programs. We also are using our capital for maintenance, expansionary, and innovation capital investments together with targeted acquisitions to strengthen our customer relationships, our positions in the markets we serve, and our expansion of new products and services.

Obviously, I'm very proud of our Universal family of companies and the people who drive our business. Their enthusiasm is contagious, they are shareholders who want better results, and they have the talent and ability to achieve them.

Thank you again for your time and investment in UFP. And while, as a lifelong Lions fan, I might trade one Super Bowl victory for seven feet of snow, let's hope for a break from the severe weather for our friends in New England and all along the East Coast. Thanks, and have a great day.

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