UFP Industries Inc (UFPI) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter-three 2015 Universal Forest Products Inc. earnings conference call. My name is Sally, and I will be your operator for today. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Lynn Afendoulis, Director of Corporate Communications. Please proceed.

Thank you, and welcome to the Universal Forest Products Incorporated third-quarter 2015 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. The replay will also be available at that website through November 15, 2015.

Before I turn the call over to Matt, 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. Thank you very much for joining us this morning. It is truly a privilege for me to represent the great people of UFP on this call, especially when they deliver phenomenal results like these. We are thrilled with the record-breaking performance and have our sights on even loftier goals. Our quick review of our key focus areas is as follows.

Sales -- third-quarter sales were $773.2 million, which was a 6.9% increase over 2014. Year to date, sales are up $195.8 million over 2014. By market for quarter three, sales growth was retail up 9.2%, construction up 0.7% and industrial up 10.9%. Overall unit sales were up almost 12%, while the overall lumber market declined 18% year over year for the quarter and prices for Southern yellow pine decreased 22.4% year over year for the quarter.

We don't think this downward trend in prices will continue much lower. And, in fact, some production has been taken off the market recently in order to balance supply with demand.

As for profit, our third-quarter net earnings increased 32.8% over 2014 to $25.6 million. EBITDA for the first nine months of 2015 is $137 million compared to $108 million last year. And overall, our EBITDA margins for the latest 12 months were 5.8% versus 5.2% for the same period a year ago. Now, we did receive some margin percentage lift as a result of the lower lumber market and good purchasing decisions.

Our inventories have come down nicely and are now at $288 million. As a percent of current month sales, it is 122.6% versus 122% in 2014. And we do expect it to be more in line with sales for the balance of 2015 except for position buys and special items. Our accounts receivable currently stands at 91.9% current, and our write-off percentage for the quarter is less than 1/10 of 1% of sales. We're very pleased with our performance thus far with receivables.

Now I would like to briefly review some of our strategic priorities for the balance of 2015 and beyond. Our new product sales initiative continues to meet our expectations. Year-to-date new product sales through September are $181.2 million, and we are on track to hit our goal of $190 million in new product sales this year. We are also well-positioned to hit our target of $250 million annually by the end of 2017.

We're very excited about the introduction of our Deckorators Vault non-wood composite decking at the recent DeckExpo show. It was very well received and has far superior features and benefits to the competition. And we are also seeing some traction with our [Bellmat Hill] outdoor entertainment products online. Sales are modest thus far but growing nicely.

In personnel, another one of our focus areas, we continue to expand our training and recruiting efforts to supplement our growth. In addition to our normal hiring of sales and management trainees, we have added additional design and engineering professionals to help us pursue more solution-driven business in our growth market.

Capital deployments is always a concern. And as we evaluate opportunities for utilizing capital, we continue to focus on growth, improving efficiencies and providing a good return our shareholders.

We have been diligently pursuing acquisition opportunities throughout our target markets. And as we have discussed many times, valuations remain a challenge, making it difficult to earn a fair return on the expected investment necessary to acquire the target. Though in select markets where we cannot agree on valuations with potential targets, we will be increasing our capital investment to grow organically.

Our returns to shareholders are achieved through our cash dividend and our modest share repurchase programs. And as you know, our stock buybacks are designed to repurchase shares commensurate with new issuances under our stock-based compensation programs.

In transportation, again, this is a constant area of focus. We continue to make improvements. We are looking to add to our logistics teams to position us for better performance in 2016 as well.

Overall as a Company, we remain excited about our prospects going forward, and I have great confidence and faith in our team. We continually seek out new avenues for growth which complement and enhance our existing businesses, and we also seek out new and talented and motivated employees who will continue to drive the growth and improve performance.

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. Mike?

Thanks, Matt. I will start with highlights from the income statement. Our overall sales for the quarter increased 7% due to a 12% increase in unit sales, offset by a 5% decrease in selling prices due to the lumber market. Our unit sales were up due to a combination of acquisition and organic growth. Businesses we acquired since Q3 of last year contributed 3% to our overall unit growth, while our organic growth is up 9%. By market, sales to the retail market increased 9% due to a 13% increase in unit sales. Unit sales increased due to a combination of market share gains, improved consumer demand and our new product sales initiative. It's worth noting that our sales to big-box customers grew by 17% this quarter and our new product sales grew by over 19%.

Our sales to the industrial market increased to 11%, driven by a 17% increase in unit sales. Recently completed business acquisitions contributed 11% to our growth in unit sales. The remaining 6% organic growth resulted from share gains with the existing customers as well as adding many new customers.

Our overall sales to the construction market increased 1% due to a 6% increase in units offset by a 5% decrease in selling prices. Our greatest unit sales growth continues to be with customers that buy our concrete forms as we continue to gain share. In addition, our unit sales to manufactured housing fell by 2% while our unit sales to residential construction customers increased by 10%.

Moving down the income statement, we're very pleased to report our third-quarter gross profit increased by 24% and almost 190 basis points as a percentage of sales. The increase in our profitability in margins this quarter was driven by a handful of factors including favorable improvements in our sales mix to higher-margin products, strong organic unit sales growth and leveraging fixed costs, and effective buying in lower lumber costs on products we sell with fixed selling prices.

SG&A expenses increased year over year for the quarter by $8 million or 13%. By expense category, our overall increase in SG&A included a $3 million increase in wages and benefits related primarily to greater headcount and another $3.3 million increase in incentive compensation tied to profitability. I was pleased to see that our core SG&A expenses without our bonus incentives remains flat sequentially at about $58 million comparing Q3, Q1 and Q2.

Overall, we are very pleased to report that our growth in gross margin improvements drove a 32% increase in our operating profits and 33% increase in earnings this quarter.

Moving on to our cash flow statement, our cash flow used in up -- provided by operating activities improved by $51 million so far this year and was comprised of net earnings of almost $65 million along with $32 million of non-cash expenses as well as a $25 million decrease in working capital due to lower lumber prices and as a result of bringing inventories in line with expectations.

Investing activities included capital expenditures of almost $37 million including expansionary and efficiency CapEx of over $14 million. We currently plan to spend approximately $50 million on CapEx for the year.

With respect to the balance sheet, at the end of September we had no outstanding balance on our revolving credit facility. And our total debt net of available cash dropped to $23 million compared to $59 million a year ago. This leaves us with plenty of capital to fund future growth, dividends and share buybacks -- buyback plans.

Finally, we are very pleased to report that our trailing 12-months return on invested capital has increased to over 10% for the first time since the recession, which is the goal we've been striving hard to achieve.

That's all I have in the financials, Matt.

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

(Operator Instructions) Steve Chercover, DA Davidson.

Just three quick ones for me. First of all, can you give us a sense if there's any geographic trends that we should be aware of? I guess I'm wondering if there's still any pent-up demand in the South, particularly Texas, given -- that was pushed back by the Q2 rains.

That's a good question, Steve. I think if -- Texas in particular has recovered nicely from the rain. I think the labor issue is probably the bottleneck there. So if there's enough labor to perform the extra work, then it will get done, but I think that's really what we are seeing is the bottleneck.

But might some of the strong activity persist into Q4? I think it's still pretty hot and warm down there.

Yes, it certainly could. I think Texas is still recovering from the rains they had. It may persist longer, you just don't know.

Okay. And I agree with you that lumber is probably near bottom, especially given the actions taken on both sides of the border to reduce production. But if there's minimal upside, can you maintain margins in this 14% range if lumber was to stay flattish into 2016?

That's a great question. And I think as we looked at it, obviously there's some benefits in terms of margin percentage. Kind of depends on what the lumber market does as well as all the other product mixes. Probably an equally important factor for us.

I think we dive into the third quarter itself and looking at how the lower lumber market helped us on fixed-price products we have, I think that's probably about 100 basis points out of about 190 that we improved for the quarter. So that portion can be tougher to duplicate.

Yes, I'm not saying it would grow. But if lumber flattened around here and you guys continue to improve your operations, then presumably that's always a stretch goal but not impossible.

Yes, it's certainly a goal, Steve. I probably couldn't commit to you that everything -- in a flat market that everything stays the same. And product mix is probably a bigger driver for us.

Got it. And then my last question is sales construction is lower -- let me rephrase it. I think it's encouraging that your growth is coming from retail and industrial, and I think you are outpacing both of those markets. And yet, sales construction is lower than the market. And I know that falling prices introduce noise there. But is that an opportunity if housing continues to accelerate by about 100,000 units a year?

Yes, I think for us, Steve, you have to look at the markets that we serve. We are in what we want to be: long-term stable markets. And if you evaluate the markets where we are with our site-built activities, which is what you are referring to, I think that's how you would analyze and look at how our growth will happen. We're not necessarily looking to get into the big markets. We are comfortable in the markets that we serve today, and we will grow within those areas.

Okay. And I will throw in one last one. And if housing remains kind of skewed more towards multi-family to single-family than it has been over normal cycles, that's an opportunity for you as opposed to a headwind?

Correct, yes. We kind of anticipate that that will be the case going forward given financial constraints on buyers. And we think there will be more renters than maybe there has been historically.

But your facilities are well-equipped to provide --

Very well-positioned for that business.

Great. Thank you very much.

Jay McCanless.

First question I had is on the lumber. Can you tell me again what you said the lumber impact was this quarter on sales?

Overall, it was a 5% decline in selling prices because of lower lumber prices.

Down 5% on lumber. Okay. And then on the SG&A, can you give me to split again between what you said was incentive comp in the new headcount?

Yes, the increases?

Yes, the increases.

The increases were $3 million of the increase in SG&A was wages and benefits and headcount related. And $3.3 million an increase was incentive comp.

With the base staying around 57, 58. Correct?

That's exactly right.

Can you guys quantify at all -- you gave guidance of 100 -- not guidance, but sort of about 100 basis points of the gross margin improvement was due to fixed price products. What percentage of your sales on average are in fixed price products now and are those increases that we are seeing at the big-box and in the new product side? Is that a big reason why you guys are seeing this gross margin lift?

Jay, I will let Mike dig into the details. I will try to give you my macro picture of you here. You have to look at the timing, very herbal price products versus fixed price products. And, again, that's why keep going back to the product mix. A lot of variable-price products are sold during second and third quarter, probably the heaviest concentration. So, again, I think we had a good mix, and that's the mix that we're trying to shoot for as we go forward as well. But Mike, I don't know if you can add any more color.

Unless the fixed-price product comes on residential construction, commercial, and industrial side, the retail business, like Matt said, especially in Q2 and Q3 is a little more weighted towards (inaudible) the variable price. It certainly does have the value-added products we sell into retail at fixed prices, but it's a little more weighted towards variable.

So the benefit that I talked about on the lower lumber prices really occurred more at the industrial and residential construction areas.

Okay. And then could you guys maybe -- in terms of unit volume, did you guys ever take a look and see how much of the unit volume growth that you saw this quarter was maybe stuff that got pushed from 2Q into 3Q?

We really don't have any visibility into that, Jay. Anecdotally, you can kind of look around and see that in some markets -- and we mentioned Texas already -- that it was a little bit softer in Q2 and a little bit better in Q3. But those are really more anecdotal. We don't have a real way of saying how much it was deferred and how much is natural for that time period.

Understood. Okay, great. Thanks guys.

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

Well, thank you once again for your interest and investment in our Company. And I know we in the state of Michigan are gearing up for the big game on Saturday. But unfortunately, the Flying Dutchmen are not televised, so I will simply say go blue and go white for fans of the other game on Saturday. Have a great day.

Thank you. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.