UFP Industries Inc (UFPI) 2015 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Quarter four 2015 Universal Forest Products, Inc.'s conference call. My name is Carolyn, and I am your Operator for today. At this time all the participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, the call is recorded for replay purposes, and now I would like to turn the call over to Lynn Afendoulis, Director of Corporate Communications. Please go ahead.

Thank you. Welcome to the Universal Forest Products incorporated fourth 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 for a webcast at www.ufpi.com. A replay will also be available at that website through March 19, 2016.

Before I turn the call over to Matt, let me remind you that yesterday's press release and today's presentation include forward-looking statements as defined in the Private Securities and 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. If there ever was a time when we could just drop the phone and let the results speak for themselves, this would be it, but that's not our style. Our 2015 results were outstanding, but we know that competition is fierce, and we also know that our previous accomplishments do not guarantee future success. Fortunately, our people are so motivated to excel and to break their own records, that we see no reason for a let down in our efforts or our performance. I would like to start by giving all of the members of our Universal family of companies the recognition they deserve for what I consider a spectacular 2015. In the fourth quarter they set new records for performance, and that helped make UFP's 60th year in business its most profitable ever.

Before we walk away from 2015, let's quickly review some key highlights for the fourth quarter and the year. Net sales in Q4 were $653.6 million, and for the year were nearly $2.9 billion, representing year-over-year increases of 5.4% and 8.5% respectively. Our sales by market were as follows. Retail up 13.6% for the quarter to $230.7 million, and up 10.8% for the year to $1.1 billion. Construction was down 1.6% for the quarter to $221.2 million, and up 1.4% for the year to $898.3 million. Industrial was up 4.7% for the quarter to $209.3 million, and up 13.5% for the year to $896.6 million. Our net earnings for Q4 from $18.9 million, or $0.93 per diluted share, up 103% over the fourth quarter of 2014. And for the year net earnings were $80.6 million, a 40% increase over 2014. EBITDA for the quarter totaled $42.2 million, and for the year was $179.5 million. Gross margins were up significantly over 2014, due in part to a lower lumber market, as well as good strategic buying decisions. We also benefited from better than expected weather in most of the country throughout the quarter, and our customers continued their strong performance, which helped keep our facilities busy and boosted our operating leverage.

As we look at our inventories at year-end, we feel very good about the level and position of our inventory. Since year end the market has been relatively stable, although the market is down 10% from January 2015 levels. With announced curtailments in production management programs in place by some mills, we anticipate a more balanced market in the near-term, as supply is brought in line with actual demand. OSB while slightly higher than a year ago, is still hanging near historical lows. For Accounts Receivable we are 87.9% current, which unfortunately is more typical for year end, but still well below our target. We continue to look for ways to improve the percent current, while also maximizing sales and profitability. As great as 2015 was, our whole team recognizes that seven weeks after year-end, 2015 is no longer current or meaningful, and our focus is solely on 2016 and beyond.

We are still comfortable with our long-term growth targets of sales growth of 4 to 6 percentage point greater than positive GDP growth, and an EBITDA percentage in the 5% to 6% range. One of our biggest challenges is to continue to add new products and services to our mix of sales. We have increased our investments in new products, and our results continue to improve. Our new product sales for 2015 were $250.1 million, which exceeded our 2017 goal of $250 million. Going forward our long-term goal is to have new product sales comprise at least 10% of our total sales. We were not at that level in 2015, and we expect total sales to keep growing, so we have some work to do to get to that level. A few notable products are the Pro Wood Duracolor treated lumber products, the LCISS insulated panel product for new construction and remodeling applications, our high-end Deckorators Vault decking product, where we will be adding capacity in 2016, and our increased growth in flat engineered panels for a wide variety of applications in each of our markets.

In addition to normal projected organic growth, we continue to look at acquisition opportunities. As we have mentioned for quite some time valuations have been challenged, although we now believe that valuation multiples for most companies in our markets have peaked. We expect to complete acquisitions which complement our existing products and services, as well as pursuing new opportunities that get us into additional new products, new expertise to enhance our existing offerings, or additional geographies. We still maintain our philosophy to pursue targets which will provide us with a reasonable return on our investment. In the absence of these types of sensible acquisitions, we will increase our capital expenditures to facilitate more organic growth. We have improved our cash flow generation to meet these capital needs, and we will approve those capital projects which meet our return on investment targets.

On the personnel front, we continue to strengthen our team, and are always looking for more talented hard-working individuals. The regulatory environment coupled with the so-called Affordable Care Act, is driving costs up and has the effect of keeping potential entry-level employees from joining the workforce and getting the training they need. So in addition to our existing training programs, we will be piloting new programs to help train recent high school or community college graduates, to be better prepared for the business world. We hope this program will help those that have the smarts and the motivation, but maybe not the money to pay for training or college. Overall we believe in our diversified business model, and while we understand that certain market conditions that occurred in 2015 may not replicate themselves in 2016, as long as we have a stable economy, we feel very good about our prospects. Now I would like to turn it over to Mike Cole for some more detailed financial information.

Thanks Matt. Before reviewing the financials, I should briefly address the impacts of the lumber market. Overall lumber prices for the quarter were down almost 16% while prices of Southern Yellow pine, which represents our highest volume of purchases, were down almost 14% for the quarter. As a reminder, commodity lumber prices impact not only our cost of inventory, but also our selling prices for products we sell in a variable pricing formula at the current market price of lumber. I will start the financial overview with the highlights from our income statement.

Our overall sales for the quarter increased 5% resulting from an 11% increase in unit sales, offset by a 6% decrease in selling prices due to the lumber market. Reviewing by market, sales for the retail market increased 14%, driven by a 17% increase in units, offset by a 3% decrease in selling prices. Unit sales increased due to a combination of market share gains, improved consumer demand, and our new product sales initiative. I think it's worth noting that our sales to big-box customers grew 22% this quarter, and our new product sales grew by over 44%. Our sales to the industrial market increased 5%, because of a 13% increase in unit sales. Acquisitions contributed about 7% to this unit growth, leaving 6% as the organic growth rate. This is a little lower than we have achieved in past quarters, which we think was due it a general softening of demand.

Our overall sales for the construction market decreased 2%, due to a 6% decrease in prices, offset by a 4% increase in unit sales. Our greatest sales growth continues to be with customers that buy concrete forms, as we continue to gain share. In addition, our unit sales for the manufactured housing market increased by 5%, while our unit sales to residential construction customers remained flat.

Moving down the income statement we're very pleased to report that our fourth quarter gross profit increased by 34%, and 320 basis points as a percentage of sales. The increase in our profitability and margins this quarter was driven at a handful of factors, including favorable improvements in our sales mix and higher margin products, strong organic unit sales growth and leveraging fixed costs, effective buying, and lower lumber costs on products we sell with fixed selling prices, which we estimate drove about 150 to 200 basis points of our gross margin improvement.

SG&A expenses increased by $9.2 million, or 16%, excluding bonus expense, our core SG&A remained at about $58 million, compared to $54.5 million last year. A 6.4% increase, but considerably less than the 11% increase in unit sales as we leveraged our fixed costs. Our bonus expense increased as a result of our profit growth and improvement in our return on investment capital. Overall we're very pleased to report that our growth and gross margin improvements, allowed us to more than double our bottom line earnings this quarter.

Moving on to our cash flow statement for the year. Our cash flow from operating activities improved by $96 million to $169 million this year, and was comprised of $127 million of net earnings and noncash expenses, and a $42 million decrease in working capital, primarily due to lower lumber prices, and as a result of bringing inventories in line with expectations. Investing activities included capital expenditures of almost $44 million, including expansionary CapEx of over $16 million. And under financing activities I should point out that in addition to dividends, we paid off the small balance we had on our revolving credit facility, leaving all $285 million available.

With respect to our balance sheet, it continues to be in great shape with available cash net of debt of almost $3 million, compared to almost $99 million of net debt a year ago. This leaves us with plenty of capital available to fund future growth, dividends, and share buybacks.

Looking forward to 2016 we plan to increase our capital expenditures to a total of $70 million to $75 million, including expansionary CapEx of about $40 million. As we have mentioned on previous calls, multiples for business acquisitions are still a bit high. If that continues, we'll reinvest into growing our business organically where we're more comfortable in our ability to earn a reasonable return. Finally with respect to our financial goals and annual results, we are very pleased to report that our people achieved unit sales growth of almost 12% for the year, exceeding our goal of 7% to 9%. They beat our EBITDA margin goal of 6%, and they increased our return on invested capital to over 11%, exceeding our weighted average cost of capital. That is all I have on the financials. Matt.

Thank you Mike. Now I would like to open the line up for any questions that you may have.

Thank you. (Operator Instructions). Comes from the line of Jay McCanless from Sterne, Agee. Please go ahead. Jay, you may have your line on mute. You're live in the call.

Yes. Got to turn that mute button off. Good morning guys.

Good morning Jay. How are you?

Doing well. Thank you. Matt, could we go back to, or Mike sorry to the gross margin bridge. I think you said 150 to 200 bips of the gross margin gain over last year came from lower lumber prices. Could you fill in the rest of that up to the I think you got how much the gross margin was up like 270 bips year-over-year. Could you fill in the rest of that from the lower lumber prices?

Yes. The gross margin increase was 320 basis points for the year. So there were three main factors that I called out. The first was the lower lumber prices on products we sell with fixed selling prices. We think that was about 150 to 200 basis points, just kind of looking at the sequential improvement in margin on those products from quarter to quarter. But the other things were, we can see to have favorable improvements in our sales mix, and in industrial and in other areas too, new products has certainly given us a margin lift, and then we had great organic sales growth this quarter, and that certainly helped us leverage fixed costs. That was probably $4 million or so to the gross profit.

Okay. And then when we think about lumber prices to start 2016, I think SYP is still down year-over-year, and I think OSB is actually up a little bit year-over-year. Should we expect the same type of gross margin impact from the lower lumber prices like you saw this quarter? And if lumber were to turn later in the year, I guess what I'm asking is number one, should we expect the same impact on the gross margin from lumber prices being low right now? And then as you guys transition to more commodity goods in the second and third quarter, how should we expect the gross margin to trend if lumber prices stay where they are now?

Yes. I think, Jay, it's really difficult to predict because more of it has to do with product mix than anything else, so selling seasons and as Mike has pointed out whether they're fixed or variable priced items is going to have a bigger determination than the level of the lumber market at this point. I think as I said, I think our people did a great job with some good strategic buying decisions, which we hope are repeatable, but they're not always, so I think as we kind of look at the market, it's going to depend on how quickly the market moves, if it moves and when it moves, and the product mix is more important than being able to say that the gross margin is going to stay relatively the same as long as lumber prices are lower, because I don't think that's necessarily the case.

Okay. And then just wanted to ask again for modeling for the full year, when I think about the retail segment of the business, could you talk about what percentage of those goods now for the full year, or maybe even on a quarterly basis, are going to be fixed price goods versus commodity goods? Because it seems like with the big gain that you guys had in the retail sales segment this year versus last year, I would think that was a big driver for the gross margin gain that you saw from 4Q 2014 to this year?

Yes. I think as you look at it, Jay, the retail market tends to be a much more variable priced market, so I probably wouldn't put your emphasis there. I think the sales growth and the product mix, particularly new products are skewed heavily towards retail, so that's very helpful, but I wouldn't necessarily assume that the lumber market gains are going to come in that space.

Yes. Treated lumber goes to the retail market, Jay, and that's our biggest category of variable priced product.

Okay. And then so the sales mix change that you guys talked about that drove the gross margin gain, was most of that in industrial, or was it in construction?

Yes. I think what it is to kind of put it on broad terms, Jay, it's really much more value-added, so more heavily designed and engineered products, more assembly, more finished goods production as opposed to selling sticks and panels. I think we have moved along that continuum that we have talked about for a few years now, and we continue to get more into that, where we can provide greater value to the customer. That's our goal, and as we do that tends to enhance our margin level.

Got it. Got it. Got it. And then in terms of the acquisitions that you're looking at, is there a theme to those acquisitions? Is it focused on packaging, other parts of the business? Where are you seeing the most opportunities right now?

Well, each of the markets has opportunities. We look at, clearly as we look at some of the industrial areas, we still have some holes we could fill-in there. We have potential for what we call bolt-on, or add-on type acquisitions in each of our other markets, so we're going to try to be cautious about it, and try to find those that provide us with the best return in the shortest period of time. And then, again as I mentioned, we're going to continue to look for some new products to add to our mix, and new services and other things that we can do to expand throughout our entire network of operations.

Okay. Alright. I'll get back in queue. Thanks guys.

Alright. Thank you.

Thank you for that question. The next question comes from the line of Steve Chercover from DA Davidson. Please go ahead.

Thanks. Hi, Matt. Hi, Mike.

Good morning.

Morning, Steve.

Okay. Just a couple. About five years ago I guess I'll put Mike in the hot seat here. About five years ago you said you might resume giving guidance when the market was less volatile? So are we there yet?

Alright, Steve. I have to bail Mike out there, Steve. That was the prior administration, and therefore, the newer administration is not a fan of guidance.

Fair enough. Okay. I had a feeling that we weren't going back there. And then I know you guys don't like to talk about the weather, and it was a terrific quarter, but would you say that weather was actually quite benign in Q4, and perhaps thus far into Q1 of this year?

It certainly has been better than it's been in the recent past, Steve, and I think we're fortunate for that. It really has more to do with our customers being able to take deliveries, and continue to do their projects, and still having strong sales themselves, which enabled us to help keep that production going.

Got it. And then finally, Matt, you talked about recruiting associates and assisting them with post-secondary education. So is that for folks on facility floors, or is that for kind of sales and management roles?

It's going to be both. Obviously we're drawn to our own employees, and if they want to move up in the organization, but they haven't had the ability to go to post-secondary education, we're going to start very, very small, but the concept is to try to bring people in that can move up in the organization, who want to do better and give them the platform to do that.

Well, that's always been the way. I mean even the gardener can become the CEO, so we know that there's ability there.

That is true.

But I mean with perhaps the decline of the oil patch, and the Dakotas and elsewhere, are you finding it any easier to get labor that is I guess we'll call them blue collar at the moment?

I wouldn't say it's any easier, but North Dakota we don't have any facilities there, but it probably would have been a good opportunity to get people in that market, and parts of Texas, the oil patch as you call it has had some impact there, but other parts of their economy are growing, so I don't think there's a plethora of people out there who are looking to start out in an entry-level blue color type situation, but we're still fighting that battle, and we'll continue to do it.

Great. Well, good luck on establishing a new high watermark in 2016.

Well, thank you, Steve.

Thank you. The next caller is Mark Wilde from Bank of Montreal.

Good morning, Matt, Mike.

Good morning, Mark. How are you.

Good morning, Mark.

Good. Congratulations on a good quarter. A few questions. Matt, you mentioned something about a 10% decline in January. I wasn't clear whether that was a volume issue that you were seeing, or whether that involved price or what that was? Can you clarify?

Sure. Yes. It is more of the lumber market, Mark. If you look at January 2015 to January 2016, the market is down about 10%, so we're still plugging along, but I just thought that was an important fact to note.

Alright. Second question. Mike, that jump up in expansionary CapEx is like about $30 million year-over-year, can you talk a little bit about what that's going into?

Well, it's going into a lot of different areas. It's capacity relative to new products, expanding capacity within industrial, that can mean expansion at existing plants given the opportunity to do more and increase their capabilities, but also new plants. We have new plants online in Oklahoma, and another new plant in Colorado. So it really touches many of the different areas in our business.

Okay. And the last question I had, just is currency having any effect on the business? I mean I can see that for a lot of types of wood products we're seeing a lot more imports and we're seeing fewer exports. Does any of that have any impact on Universal?

Yes, I think, Mark, what we're seeing is that it's clearly helping keep pricing down from a lumber market perspective. I think the Canadian species have a significant value enhancement due to the currency difference. There's also a number of imported products that have a better price advantage given the strength of the dollar, and we're also seeing the mills probably struggle a little bit more selling offshore, because of that currency issue. So I think that might be one of the drivers as to why the market is lower this year than it was a year ago.

Okay. That's helpful. Good luck in the first quarter and through 2016.

Thank you very much.

Thank you for that question. There's no further questions in the queue, so now I would like to turn the call back over to Matt Missad for closing remarks.

Once again, I would like to thank you for your time, and your investment in UFP. While we can't control the economy or the political landscape, we can continue to do our best to manage and grow our business, and continue to create new opportunities for our Company and for our people. Since we have an early Easter this year, let's hope for afternoon early spring. Have a great day.

Thank you Matt. Thank you for your participation in today's conference. That concludes your presentation. You may disconnect. Have a good day.