UFP Industries Inc (UFPI) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Universal Forest Products second-quarter 2016 earnings release conference call and webcast. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Lynn Afendoulis, corporate communications. You may begin.

Thank you, and welcome to Universal Forest Products Incorporated second-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'll open up the call for questions.

This conference 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 August 20, 2016.

Before I turn the call over to Matt, let me remind you that yesterday's press release and today's presentation includes 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 will turn the call over to Matt Missad.

Thank you, Lynn, and good morning, ladies and gentlemen. Thank you very much for joining us on our call.

At the risk of plagiarizing myself, I don't think you can have too many superlatives to describe the performance of the employees of the family of Universal. We set another record in the second quarter for earnings, which is also an all-time record for earnings in a quarter during our entire 61-year history. And we do believe in the adage that records are meant to be broken.

Now, we don't take these terrific results for granted, and we are not taking selfies and saying, look at me. We are keeping our head down to focus on finding new ways to add value and to keep our momentum going. We remain confident in our people and our plans and believe that with good execution, we can continue to grow both sales and profits at our target rates. Now I would like to highlight our focus areas.

Sales for the quarter were up 4%. Retail was up 7.5% due to strong repair and remodel demand. Industrial was down 2.9% due to lower volumes from our existing customers, which they attribute in part to the stronger dollar which hurts their export business. Construction was up 6.5% as housing starts increased.

While we know we can immediately add more commodity sales to grow the top-line number, we are more focused on adding value. To achieve sales growth and add value, we continue to pursue both our acquisition growth and our organic growth plans. Our recently announced acquisitions will drive sales and increase our market penetration. We also expect to have several new facility expansions as well as a new greenfield operation in Oklahoma completed in Q4.

We continue to build the pipeline of other acquisition targets in order to meet our strategic goals in 2017 and beyond.

Gross profit remained strong and increased over Q2 2015 by 170 basis points. Net earnings for the quarter, as I mentioned, were an all-time record $33.4 million, and the EPS was $1.64 a share, well above 2015's EPS of $1.29. Our year-to-date EBITDA is $108 million.

Accounts receivable were $318.5 million, and that is in line with our sales growth. Our percent current remains near the 93% mark.

Inventories were at $298 million, which is about 10% below 2015's level. So, overall, our inventories are in very good shape relative to our current sales level.

The lumber market itself on the SYP Southern yellow pine market rose during April and May and declined in June, finishing the quarter near where it started. The STF market, on the other hand, rose slowly throughout the quarter.

The next area we want to talk about is new products. We are very excited about our new products and our new product growth. New product sales through Q2 are $160 million versus $135 million in 2015.

The versicolor-treated products and the Deckorators products, including the Vault decking, continue to grow. The feedback from consumers on the vault decking products has been very positive, and we look to continue to grow sales there. Our investment in product development efforts is expanding, and we remain on track to open our design, testing and research facility in Q3. We need to be faster to market and to increase our throughput on new products. This facility will help accelerate prototyping and application testing and help us streamline the new product vetting process.

International manufacturing growth via acquisition remains a challenge. We are having a difficult time finding acceptable companies and an investment value which permits our ROI model to work. However, we keep trying and we keep pursuing new targets. In the meantime, we plan to dedicate more resources to our international sales and purchasing efforts to build on our existing business.

Now I would like to turn it over to Mike Cole for more detail on the financial performance.

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 up 8% and Southern yellow pine prices, which represent our highest volume of purchases, were up 4%. As a reminder, commodity lumber prices impact not only our cost of inventory but also our selling prices and working capital.

I will start the financial overview with highlights from our income statement.

Our overall sales for the quarter increased 4%, resulting from a 3% increase in unit sales and a 1% increase in selling prices.

Reviewing by market, sales to the retail market increased 8%, driven by a unit increase of 5% and an increase in selling prices of 3%. Our unit sales growth rate this quarter was lower than Q1, which we believe was due to a shift in demand due to favorable weather earlier this year. Our sales to the industrial market increased -- or decreased 3%, driven by a decline in unit sales. We believe this decline 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. On a positive note, we believe we continue to take share, and added almost $6 million in sales to new accounts and [formulated] new product sales this quarter.

Our overall sales to the construction market increased 6% due to a 5% increase in unit sales. Within this category, our unit sales to residential construction increased 10%, commercial construction grew by 3% and manufactured housing increased by 4%.

Moving down the income statement, we are very pleased to report our record second-quarter gross profit increased by 17% and 170 basis points as a percentage of sales. The increase on our profitability and margins this quarter was driven by a handful of factors including favorable improvements on our sales mix to higher-margin products, particularly on sales to our retail and industrial markets, organic unit sales growth to our retail and construction markets and leveraging fixed costs, and effective position buying for inventory.

SG&A expenses increased year over year for the quarter by $9.6 million, or 14%. Accrued bonus expense comprised about $14 million of our SG&A this quarter and was up about $3 million due to our improved profitability and return on invested capital. Excluding bonus expense, our core SG&A was about $64 million and increased $6 million, or 11% compared to last year. The increase in our core SG&A was primarily due to higher compensation costs and increases in sales and other incentive compensation and certain employee benefit costs.

Overall, we are very pleased to report an increase in our operating profit of $9.5 million, while our bottom-line earnings increased by almost $7.5 million.

Moving on to our cash flow statement for the year, our cash flow from operating activities improved to $40 million this year and was comprised of $54.5 million of net earnings and almost $21 million of non-cash expenses, offset by an increase in working capital since the beginning of the year of almost $36 million. We are very pleased with our working capital management this quarter, particularly our inventories which were less than 109% of June sales versus over 125% last year.

Investing activities included capital expenditures of $24 million this quarter, with expansionary CapEx of over $8 million. As a reminder, we plan to spend about $70 million in total CapEx for the year.

With respect to our balance sheet, continues to be strong with almost $88 million in surplus cash and almost $86 million in debt, leaving us with plenty of unused debt capacity available to fund future growth and dividends.

Finally, our trailing 12-month return on invested capital has increased almost 14%, substantially driven by an increase in our EBITDA margins of 6.9% from 5.5% last year.

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

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

(Operator Instructions) [Kinson Montora], BMO.

Just first question on the construction market -- and obviously you guys had pretty good growth, 10%, not better than the housing starts. Can I just provide some color of what you are seeing in the market and where the growth is coming?

Well, I think from the construction side, we have -- there's a number of different areas that we serve within that market. We have the commercial construction, we have the manufactured housing and we have the traditional site-build housing within that market.

The multi-family growth remains strong. We are seeing a lot there. We are adding new products within that space. So, that is part of it. And as you know, we don't have a total national footprint on the site-build side. It's primarily a geographic play. And so that may be driving some of the changes in the national numbers versus the regional ones.

Got it. That's helpful. And then switching to M&A, just generally can you talk about end-markets or geographies that interest you?

Yes, I think, as we've talked about before, we want to, again, increase our geographic footprint in the areas where we aren't. We also want to increase our market penetration in our existing markets. And we continue to look for new opportunities to add adjacent markets and adjacent product lines to our mix. So -- and that is not just in the US, but also internationally.

And internationally, what markets would be -- are you all interested in?

We are keeping our eye -- the BRIC countries are things that we've talked about before, but they have their share of issues at the moment. So, what we're trying to do is find opportunities where we have good partners, where our multinational customers are located or they want us to be and also where there is opportunities with existing partners to grow business. So, we haven't limited the scope at this point, but we are looking at all reasonable opportunities.

Okay. And then just one last question, obviously your stock has done very well now across $100. Have you all considered a stock split?

That is certainly something that is a good idea to look at and think about, and that's something I'm sure that our Board will be talking about.

Okay. Thanks very much. I will turn it over. Good luck for the rest of the year.

Michael Conti, Sidoti.

Thank you for taking my questions; just a couple here. Just looking within the industrial side, looks like the soft demand continued from the first quarter. Can you just give us an idea if that declining units -- does that meet your own internal projections? And then how much of that decline was specifically tied to just being selective?

I don't think we have the color on that, Michael, to give you a fair answer. I couldn't really identify it that way. I think as we look at it, our big concern is we want to continue to grow our market share based on the number of new customers that we added during the quarter. We are confident that we continue to add new share. It's just that sales with existing customers are less than they projected. So we feel confident with that that we're within the range of the market growth or, in this case, this case market decline.

Okay. And then I guess do you have the year-to-date number of how many new customers you have added within the industrial side?

No, I don't have that off the top of my head, Mike, but it's something we can get.

Sure, okay. And can you just break down the drivers for the gross margin expansion and the increase to gross margin each driver was responsible for?

Yes, that's real tough, Michael. I called out the higher-margin value-added products as being a factor. Retail and construction growth, organic growth and leveraging operating costs. And position bond. And I can see all those things coming through in our data, but to be able to give you a precise number on each one of those factors is really difficult with as many products and customers we serve. So, I would see that they all were substantial contributors to the quarter.

Sure. Got it. Okay. And then just regarding the two acquisitions, can you just give us an idea on their product mix? Is it more commodity-based or more value-add, and is there any need for incremental capital spending required just that they are now integrating to your platform?

Yes, they are two very different businesses. One serves primarily the retail market, and it will enable us to expand our penetration into that market and a lot of independent retailers and other things that they service. So, we are looking forward to that and adding some of our new products into that mix. It will be very helpful for them and for us.

The other acquisition tends to be more in the manufactured housing space. We will use that as a consolidation opportunity to combine our industrial facility. And we think that the synergy there will be very, very dynamic in that market. So, two very different markets that we serve, but in both cases they are going to drive our sales, and they will enable us to, in our belief, hit our EBITDA margin targets.

Sure, okay. And last one for me, just the core SG&A of $64 million, it's a bit higher than the first quarter. Is that the new run rate we should use for modeling purposes?

Yes, I think in Q1 I thought a core SG&A as $60 million to $62 million, depending on the quarter, was probably pretty reasonable. When I look at the core SG&A at $64 million, it is -- there's some things in there that I think that are employee benefit cost wise that will probably repeat. So I think $62 million is probably a better target, I guess, going forward.

Got it. Perfect. Thank you.

Steve Chercover, DA Davidson.

Thank you. Just a couple of quick questions. First of all, I just wanted to get a sense of how things are trending in Q3. Normally, we see some modest seasonality that provides for a slight downtick in earnings. But perhaps that's not happening in Q3 of this year. Or alternatively, maybe these acquisitions will lead towards a similar type of quarter.

I'm assuming that was a statement, Stephen, not really a question.

Well, I guess we're just looking for some help.

Sure. No, I understand.

Are your trends similar thus far in Q3 to what you experienced in Q2, which was just off-the-charts terrific?

Again, I'm trying not to give guidance. So, what I can do is I can tell you that the lumber market is trending still kind of in a stable mode. The economy overall seems to be in somewhat of a stable mode now. So, given those factors, I would expect this to be a typical type year.

All right. Then, we have seen modest shift towards more single-family as opposed to multi-family construction. And I think you've done very well with the multi-family. I'm just wondering whether that is going to be beneficial or a bit of a hindrance going forward.

Yes, I think we have a pretty balanced business between multi-family and single-family. So, I think as long as both of them continue to remain stable or growing, that is good for that part of our business. I don't (multiple speakers) shift in between multi- and single-family is not a negative from our perspective.

And then finally, any developments on the industrial side? You said it was a little bit weak, and you attributed that to the currency. Is that going to persist, do you think, or are some of those industrial products nondiscretionary? So, if people defer the purchase for a quarter or to, they still have to get them ultimately.

Yes, I think, Steve, if we split up our customer base, there's some that fall into the camp where the strong dollar is going to have an ongoing impact, as it has here recently. For other customers, it's as you said. Those are nondiscretionary, and it's stuff that will just kind of continue along.

From our standpoint, what we are trying to do is, again, focus more on our design-engineering capabilities, come up with a better product and packaging solutions for our customers, and try to make sure that we are providing more value-add to them. That has been our focus and that's where we are trying to get closer to the customer in that regard.

Great. Thanks for taking my questions.

Thank you. There no further questions in queue. I will turn the call back over to Matt Mossad for closing remarks.

Well, I would like to say thank you again. I am very proud of our family of companies and the great employees, many of whom are shareholders who are making us successful. Like Olympic athletes, our people train each day to strengthen our Company and stay ahead of the competition. Unlike the real Summer Olympics, which happen every four years, we compete every day, and we measure wins by whether we provide good returns to our stakeholders. I hope that we continue to win, just like we hope for lots of medals for our athletes and a safe Olympic Games in Rio.

Thank you again for your support, and have a great day.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.