UFP Industries Inc (UFPI) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Universal Forest Products, Incorporated, first-quarter 2015 earnings release conference call and webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Lynn Afendoulis, Director of Communications. You may begin.

Thank you, and welcome to the Universal Forest Products, Incorporated, first-quarter 2016 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 a webcast at www.UFPI.com. A replay will also be available at that website through May 15, 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 by 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 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, everyone. I appreciate you taking the time to be on the call today. Some of you may think I am running out of superlatives when I praise the terrific effort of the Universal employees. Others may think I am beginning to sound like a broken record on these calls. Both groups are correct, and I love bounding sounding like a broken record when our people do such a great job of breaking records.

The first quarter of 2016 is another example of their determination and execution and, along with a little help from Mother Nature, driving USP to the best first quarter in its history.

As you now know, the first quarter was exceptional. We were able to increase capacity utilization in our facilities, increase our operating leverage, sell new products, and continue to provide better solutions for our customers and for the end-consumers.

Here is a quick recap of our four areas of focus. In sales, first-quarter 2016 sales were $682.2 million, an increase of 7.8% over 2015. Now, the composite lumber market in Q1 was 12% below the lumber market in Q1 2015, so that impacted the sales dollars. The Southern yellow pine market was down 10% year over year. Our unit volume increased in all markets by an aggregate of almost 13%.

Now, sales by market are as follows. Retail, 17% increase. The same-store sales for our customers were up substantially over 2015 in the retail market.

Construction was up 9%. Building was able to continue throughout most of the quarter in most of our markets, which certainly helped.

In industrial, sales dollars were down 3%. While sales dollars declined, units were up 5%. Now, we continue to seek more value-added solutions and more design and engineering opportunities, and we may miss out on some commodity-type sales. Our commitment to new products continues to grow, as new product sales for Q1 were $67.5 million, up significantly from $51 million in 2015.

The next area of focus is EBITDA. Our operating leverage obviously was much better in Q1 than a year ago, and our EBITDA reflects it. EBITDA for Q1 is $42.7 million, compared with $28.5 million last year. And, more importantly, it was 6.3% of net sales versus 4.5% a year ago.

Our earnings per share for the quarter is $0.95, and that is 86% better than last year. We are very pleased with each of our companies as they focus on driving profitability. And they continue to look at ways to reduce expenses and improve efficiencies as we continue to guard against cost read.

Our inventory level was $327 million, well below last year's level and in line with our expectations. Again, more importantly, as a percent of current-month sales, it was 128.8% versus 171.4% in 2015.

The lumber market for Southern yellow pine has been climbing for the last several weeks at a fairly steady pace entering the peak selling season. It is still 2.5% below 2015 levels. The composite lumber index has been relatively flat the last three weeks. The mills are reporting steady order files. So, as of now, we look for these trends to continue.

Finally, accounts receivable -- our goal on accounts receivable is to have them 95% current. We currently were 93.52% at quarter-end, and our write-off percentage for the quarter is less than 4/100 of 1%, which is still a good statistic.

We continue to monitor credit closely and try to balance acceptable credit risks with profitable sales growth.

Those are just the highlights and tell part of the story. The other parts of the story are the strategies we are pursuing to grow the Company and improve our profitability. We have said we are going to grow both through organic expansion as well as targeted acquisitions. We are expanding capacities and consolidating facilities in California. We are adding capacity at Washington state, Idaho and Tennessee, among others.

We have been patient in the acquisition market and are finally seeing multiples come back to more normalized levels. We did complete an opportunistic purchase of a specialty manufacturer operation in Northern Virginia, which will complement our construction market operations. And we remain very active in negotiating with several other potential targets.

Our new-product sales growth remains a priority, and we plan over 70 new product introductions in 2016. By the end of the third quarter, we expect our new development and testing facility to be operational. This will help us achieve our goal of faster development of new products, as well as providing unique services to our customers.

Our international growth continues organically as we find new customers and vendors in several new countries. We continue to look at acquisition opportunities that can accelerate this growth and help us bring our products to new markets and new products they produce to our markets.

And in development and training, we continue to believe we have the best people in the industry. We also want to recruit and train more future stars.

In addition to our existing training and development programs, we are launching the UFP Business School in the fall of 2016. This unique program will provide scholarship for hard-working high school or college graduates who want a better, faster and less expensive education with a great job opportunity as part of the UFP family of companies upon completion of that education. We will have more information about the UFP Business School at a later date.

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

Thanks, Matt. Before reviewing the financials, I should briefly address the impact of the lumber market this quarter. Overall, year-over-year lumber prices were down 12%, while prices of Southern yellow pine, which represents our highest volume of purchases, were down 10%. As a reminder, commodity lumber prices impact not only our cost of inventory, but also our selling prices in working capital levels.

I will start the financial overview with highlights from our income statement. Our overall sales for the quarter increased 8%, resulting from a 13% increase in unit sales, offset by a 5% decrease in selling prices due to the lower lumber market.

Reviewing by market, sales to the retail market increased 17%, driven by a 19% increase in units, offset by a 2% decrease in selling prices. Unit sales increased primarily due to better demand, helped by a milder winter than last year, along with market share gains due in part to our new-product sales initiative.

Within the retail category, sales to our big-box and independent retail customers grew by 20% and 13%, respectively.

Our sales to the industrial market decreased 3%, driven by an 8% decrease in selling prices, offset by a 5% increase in unit sales. Our 5% organic growth rate in units was comparable to results from Q4, but lower than previous quarters, which we think is due to a general softening of demand and our operations being more selective in the business that we take, focusing on higher-margin opportunities.

Our growth this quarter was achieved through market share gains, primarily through continuing to add new regional locations at existing customers as well as adding new product sales.

Our overall sales for the construction market increased 9% due to a 15% increase in unit sales, offset by a 6% decline in selling prices due to the lumber market. Within this category, our unit sales to residential construction increased 22%, commercial construction grew by 17% and manufactured housing increased by 6%.

Moving down the income statement, we are very pleased to report our first-quarter gross profit increased by 29% and 250 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 on leveraging fixed costs, and effective buying and lower lumber costs in products we sell with fixed selling prices.

SG&A expenses increased year over year for the quarter by $9.1 million, or 15%. Excluding bonus expense, our core SG&A increased by about $5 million to $62 million, a 9% increase compared to last year. Our accrued bonus expense increased as a result of our profit growth and improvement in our return on invested capital. Overall, we are very pleased to report an increase in operating profit of $14 million, while our bottom-line earnings increased by over $9 million, or 89%.

Moving on to our cash flow statement for the year, our cash flow from operating activities improved by almost $21 million this quarter and was comprised of $20 million of net earnings and $11 million of non-cash expenses, offset by a $61 million seasonal increase in working capital. We are very pleased with our working capital management this quarter, particularly our inventories, which were less than 130% of March sales versus over 170% last year.

Under investing activities, our capital expenditures were $13 million this quarter, including expansionary CapEx of over $3 million. As a reminder, we are still planning to spend about $70 million in total CapEx for the year, with expansion of CapEx up to $35 million.

With respect to our balance sheet, it continues to be strong, with net debt of only $42 million compared to $186 million a year ago, leaving us with plenty of unused debt capacity available to fund future growth, dividends and possibly share buybacks.

That is all I have on the financials, Matt.

Thanks very much, Mike. Now I would like to open up the line for any questions that you may have.

(Operator Instructions) Steve Chercover, D.A. Davidson.

I hope your Tigers are hitting the ball as hard as you guys are.

We can only hope.

Actually, I think they are doing okay.

My first question is, you said -- and I am quoting here; paraphrasing -- that you are well-positioned to meet growing demand in the spring building season. And Mike also mentioned effective buying. Did you guys really aggressively buy lumber in the late January, early February timeframe?

I think the way I would look at it, Steve, is that we planned accordingly. We tried to buy ahead based on what we thought utilization would be. But I wouldn't say that we bought way ahead in anything that was drastically different than prior years. I think we took advantage of certain situations, but it was primarily based on what our orders looked like. So we were able to protect our margin there.

Got it. Thanks. And after going straight up for nine weeks -- I guess maybe this is more SPF -- it is rolling over pretty good now. But I also heard you say that order files are pretty strong. So do you have a view -- or we probably just didn't kind of for stable pricing over the core building season? Is that your assessment?

That is what we are being told today. As you know, it is very, very difficult to predict. But we are kind of looking at the relatively stable situation, kind of as it has been the last few weeks.

And, therefore, you think you can maintain these margins? If I am not mistaken, there might even be a little bit above what you think is sustainable.

Yes. Again, it is always difficult to predict the margin situation. But I would say we are very confident that we can continue our current performance levels.

Great. Well, thank you very much. Good luck.

Michael Conti, Sidoti & Company.

Can you -- you cut out a bit on the M&A. Can you just talk a bit more about that pipeline? And within each of your segments, where are you looking at most for maybe any bolt-ons or perhaps any greenfield operations?

Sure. I think we are looking at opportunities in each of our markets. And the nature of the opportunities, obviously, differ by market. So from an industrial standpoint, we are obviously looking at a lot of different opportunities there, both from an acquisition perspective as well as our greenfield organic growth opportunities. Which we expect most of them will have industrial capabilities.

As you look at retail, there is obviously consolidation opportunities within the market there and also new product opportunities that we are looking at.

With respect to construction, we have made it publicly known that we are staying within kind of our core geographies, but we're going to grow within those geographies and add new products and services as needed.

So I would say we have opportunities that we are working on across all of the spectrums, and we are very optimistic that we will be able to put some things together this year.

Okay. Then, on your residential on the site build, I know you are more geographically focused there. But where are you seeing pockets of strength in that particular part of your business?

With respect to the site build construction, I think we are generally seeing relative strength in each of the markets that we serve. I don't think there is any exceptions today.

Okay. And just to follow on on the previous questions on the gross margins. If prices were to stay flat from here throughout the rest of the year, how should we think about gross margins? Given that, I guess, in the back half of last year you had that benefit of consuming the lower price of lumber.

Yes. I think what you're going to have to look at is probably -- take a look at historical trends with our margins in this type of market situation with relatively stable lumber pricing. That is how I would look at it if I was trying to analyze it. And, as I said before, we are very comfortable with our current run rates. And, obviously, we cannot predict what the lumber market is going to do, but we are very confident in the ability of our team to maximize their operating leverage and to be able to utilize facilities to kind of keep the current pace going.

Jay McCandless, Sterne, Agee.

Mike, can you break out on that 250-basis-point gain on the gross margin -- can you break out what was lumber in there and then maybe some of the other drivers, please?

Yes. I called out three primary drivers, so I will work from the smallest first. The operating leverage and the volume and leveraging of fixed costs -- we are still trying to put together the -- what we think the final numbers are there. But I put that at, like, 25 to 50 basis points.

So now I think the balance of that margin improvement -- the 250-basis-point total, I think that is kind of a split between the lumber market being very low and having that basket of fixed selling price products. And then, we can definitely see the favorable mix changes in the higher-margin products (technical difficulty) through, too. So I think those kind of split the balances of that; so, 100 basis points each.

Okay. So 100 basis points for lumber and 100 basis points (inaudible).

Yes.

Okay. Perfect. Thank you.

My second question -- and I apologize if I didn't hear this correctly, but did you guys say that in the industrial business you are seeing demand softening? Is that across the board for what you do in industrial, or is that in certain businesses?

Yes, I am not sure that overall demand is necessarily softening. I know there is certainly some heavy equipment manufacturers that are seeing some difference due to the currency issues. So I think that is it. I think part of our outlook is that unit sales are still up. Obviously, not as much as we would like them to be, but that is okay. We're going to continue to improve in that area. I think the other part of it is that there may be some commodity-type sales that we are missing out on as our team tends to try to find better margin opportunities and do more value-added products.

Yes. We are trading a little bit lower growth rate than what we have seen in the past years, Jay, from a much bigger margin improvement. In the industrial area, because of financing our capabilities and what we do there, that is our biggest margin growth there.

In industrial, that means new opportunities there, your biggest growth area? Okay.

The next question I had is with the increase in the core SG&A of roughly $5 million this quarter versus last year, should we go ahead and build in a higher base rate of core SG&A, given the hiring that you guys have talked about and the staffing up? What should we be building in, I guess, is the best question for SG&A?

Yes. Good question. I think, sequentially, from, like, Q4 and previous quarters, we were running at $58 million, $59 million in SG&A. I called out $62 million this quarter, so $3 million to $4 million -- excuse me. Four -- yes -- $3 million to $4 million increase. Almost $2 million of that was bad debt expense. And so that is something that happens from time to time, and that is a few customers that we had concerns about.

So I don't know that I would build in anything for that. The balance of the increase was more compensation, headcount, benefit cost related. So I think $60 million to $62 million is probably a reasonable core SG&A amount. Again, being a bit higher, I think, because of the bad debt expense this quarter.

Got it. Okay; I think that's all I had. Appreciate it, guys. Thank you.

I am showing no further questions at this time. I would like to hand the call back over to Mr. Matt Missad. You may begin.

Thank you, again, to all of you for participating on the call today. We hope that you are pleased with your return on investment in UFP. And we know that we have to work hard every day to improve that return for the long-term.

Now, as you work the earth this spring for your outdoor projects, enjoying the light winds and the fresh outdoor air, we hope that you are including a new deck, a new railing, some post caps and maybe some of our other outdoor essentials products. Perhaps you will play some of the Belknap Hill trading post outdoor games that we make and enjoy a little campfire. Whatever you do, we hope that you will keep in mind the words of the late Maurice White, that, when you plant your flower, you grow a pearl. Thanks, and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day, everyone.