UFP Industries Inc (UFPI) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen. I would now like to introduce your host for today, Lynn Afendoulis. You may begin.

Welcome to the Universal Forest Products, Inc. fourth-quarter 2016 conference call. Hosting the call today are CEO Matt Missad and CFO Mike Cole. Matt and Mike will offer prepared remarks. Then we will open up the call for questions.

This conference call is available simultaneously and in its entirety to all interested investors in news media through a webcast at www.ufpi.com. A replay will also be made available at that website through March 23, 2017.

Before I turn the call over to Matt Missad, let me remind you that yesterday's press release and today's presentation 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 on the call this morning. The weather in Michigan is unseasonably warm, while the performance from the UFP family has been downright hot. I, once again, have the privilege of congratulating all the hard-working men and women of UFP for a record-breaking Q4 and a record-breaking 2016.

First, let's review the key metrics for 2016. Net sales for the quarter were $859.6 million and for the year were a record $3.24 billion, eclipsing the $3 billion sales mark for the first time. We saw growth in each of our markets. Retail was up 13.7% for the year, construction up 12.5% for the year, and industrial up 10.6% for the year.

Gross profit for the quarter was 14.2%, down 70 basis points from Q4 of 2015, primarily due to the higher lumber market and similar unit profitability. Net earnings were $20.75 million for the quarter, and EPS was $1.02 per share, up from $0.93 in the fourth quarter of 2015. Year-to-date net earnings were a record $101.2 million or $4.96 per diluted share, up from $3.99 per share in 2015. EBITDA for 2016 was $211.2 million, also a record, beating 2015's total of $179.5 million.

Inventories closed the year at $397.2 million, up from $305 million in December of 2015. The higher lumber market, coupled with acquisitions during 2016, led to the increase. At year-end, we believe our inventories were reasonably positioned.

As we manufacture, sell and distribute more complex products to provide one-stop delivery of highly mixed products and truckloads, inventories will be somewhat higher to serve those full-service customers.

Accounts receivable were $282.3 million at year end versus $223 million at 2015's year end. Again, higher sales levels and the higher lumber market are the main drivers for that increase. The percent current was 86.2% at year end, and write-offs for the year totaled $2.9 million or less than 1/10 of 1%.

Along with many of you, we have been watching the lumber market closely since the expiration of the US-Canada softwood lumber agreement. Discussions between various groups on this issue continue, and some are confident a consensus can be reached while the trade complaint is pending.

The market has reacted somewhat predictably thus far. The lumber market was fairly steady through the fourth quarter, and Random Lengths composite index closed 2016 approximately 13.9% above the year-end 2015 lumber market level. For the first few weeks of 2017, the Random Lengths index remained fairly flat. Over the last few weeks, however, the market has strengthened, given the good weather and orders thus far in 2017.

Our new international company has expanded our previous capabilities to both source and sell products outside the US. This group will help us capitalize on anomalies in the global lumber market and create new buying and selling opportunities. New product sales for 2016 were an adjusted $354 million. 2017 will be the first year where we sunset new products, which have peaked on the product lifecycles.

So, for 2017, we have sunset $42 million worth of new product sales and established a benchmark of $312 million for continuing new product sales. Our new sales target for 2017 for new products is $365 million. Obviously, we intend to continue to sell the sunsetted items, but they will not be counted as new products any further.

While it's always great to break records, we recognize that the challenge for us is sustained excellence. Having consistent winning seasons is very difficult in both sports and business. So, as we have stressed internally, if you want continued exceptional performance and the rewards that go with it, you've got to work it.

As we take a look at 2017 and beyond, our work includes targeted sales growth of 4 to 6 percentage points above positive GDP growth and EBITDA margins in the 6% range. We expect to achieve these goals, despite delays in orders from certain large retail clothing customers of IDX, which will likely fall short of their sales and EBITDA targets announced last fall. We expect the nine-to-15-month lag in IDX's ability to hit their growth target. The positive news is that they have been diversifying their end markets for the last several years and are seeing very positive results in their other markets. They are also discovering new synergies with UFP, which will reduce their costs and increase the bottom line in the near term.

A major part of our growth plan continues to be new acquisitions. In addition to geographic and product-based targets within our core business today, we continue to look at new opportunities to add more value, provide new alternatives and to solve customers' needs.

On the expense side, our work also includes implementing plans to reduce the rate of SG&A spend increase outside of our profit-based incentives. While we have added $15 million to $17 million per quarter in SG&A due to sales growth, new organic initiatives to drive future product and international market growth, plus SG&A contained in acquisitions, we believe there are several ways to reduce the rate of increase and find more efficiencies in our system. We will be working hard in 2017 to get to those.

And to help our shareholders, we are hoping two or three analysts will reinstitute or pick up coverage on UFPI. While we ultimately believe that good performance is the best way to drive stock value, we know our shareholders may benefit from a more robust coverage of the Company.

And now I will turn it over to Mike Cole for more details on the financial information.

Thanks, Matt. Before reviewing the financials, I should briefly address a couple of items that impacted our numbers for the quarter.

First is the higher level of lumber prices. Overall, year-over-year lumber prices were up 12%, and Southern Yellow Pine prices, which represent our highest volume of purchases, were up 16%, impacting our cost of inventory, selling prices and investment in working capital.

The second is our acquisition of idX Corporation, which contributed significant sales growth reported in our industrial market. idX also caused some lift to our gross margins and SG&A expense as a percentage of sales due to the highly value-added nature of its business.

Moving on to the financials, I'll start with the highlights from our income statement. Our overall gross sales for the quarter increased 32%, resulting from a 28% increase in unit sales and a 4% increase in selling prices due to the lumber market. Our 28% unit sales increase was comprised of 14% growth from acquisitions, 8% growth as a result of having an extra week in our fourth quarter and year-end 2016, and 6% organic growth, which is in line with our targeted growth rate of 4% to 6% above positive GDP.

Reviewing by market, sales for the retail market increased 19%, resulting from a unit increase of 11% and an increase in selling prices of 8%. Our unit growth this quarter was primarily driven by our sales to big-box customers, which grew almost 25% over last year, and new product sales growth. Our sales to the industrial market increased 52%, of which 43% is attributable to our acquisition of idX. The remaining 9% increase in unit sales was due to the extra week of reporting, along with a small organic growth rate. We believe the industrial market continues to be somewhat soft, but we are continuing to gain share of targeted business.

While meaningful organic growth has been tough to achieve as a result of market conditions, we have been encouraged by the fact that we picked up over 240 new accounts and almost 150 new locations of existing customers. Our overall sales for the construction market increased 25% due to a 20% increase in units sold and a 5% increase in prices. Within this category, our unit sales increased by 30% to residential construction, while sales to commercial construction grew by 17% and manufactured housing grew by 12%.

Moving down the income statement, you will note that our gross margins dropped this quarter, but this is simply due to the impact of higher year-over-year lumber prices on sales and cost of goods sold while we attempt to price our products to maintain a certain profitability per unit.

In quarters like this, we believe it is helpful to compare our change in gross profit dollars versus our change in units shipped to evaluate profitability. We are pleased to report our gross profit increased by 26%, despite having a tough year-over-year comparison with Q4 of 2015.

As you may recall, unusually low lumber prices in the back half of last year gave us buying opportunities that enhanced our profitability.

One other factor impacting our gross profits this quarter was an adjustment required under accounting principles to report IDX's finished goods on the opening balance sheet at fair market value. This reduced our gross profits in Q4 by almost $2 million compared to what would normally have been reported.

Excluding this adjustment, we would have reported a 28% increase in our gross profits, which is consistent with our 28% increase in unit sales. We were able to maintain our profitability per unit due to continued favorable improvements in our sales mix to value-added products, including new product sales growth and organic unit sales growth to our retail and construction markets combined with our ability to leverage fixed costs.

SG&A expenses increased year over year for the quarter by almost $21 million or 32%. Acquired businesses since December of last year contributed $16 million or 24% to this increase. The remaining increase was primarily driven by our accrued bonus expense, as well as general increases in compensation costs, sales incentives and certain employee benefit costs.

I should also point out that our total bonus expense this quarter was about $10 million, leaving a core SG&A after acquisitions of about $77 million.

Lastly, I want to point out that our effective tax rate was 34.9% this quarter compared to 30.4% last year. This increase is primarily due to the approval of the R&D tax credit and certain other credits by Congress at the end of 2015. Last year these credits were approved in the fourth quarter, and Congress made them permanent.

As a result, we reported a reduction in income taxes of about $1.2 million in the fourth quarter of 2015. Conversely, in 2016 we accrued for this benefit all year long.

In light of the difficult tax rate comparison and required finished goods inventory adjustments for idX, we were very pleased to report a 10% increase in our net earnings from controlling interests this quarter to almost $21 million.

Moving on to our cash flow statement for the year, our cash flow from operating activities improved to $172 million this year and was comprised of net earnings of over $105 million, non-cash expenses of approximately $49 million, and a decrease in our working capital since the beginning of the year of more than $18 million as our working capital management grew.

Investing activities primarily consisted of $173 million spent to acquire Idaho Western, idX and [Ubeko] during the year and capital expenditures of almost $54 million for the year, which included expansionary CapEx of almost $16 million.

Finally, with respect to our balance sheet, we used surplus cash during the year to complete the acquisitions I just mentioned, leaving us with net debt of about $97 million. Our balance sheet remains strong, and we believe we could add over $300 million in debt to continue to grow our business and feel comfortable with our leverage and capital structure.

Finally, earning a return on invested capital in excess of our weighted average cost of capital remains a primary goal, and we are pleased to report our return increased to almost 14% in 2016, another record for UFP.

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

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

(Operator Instructions) Ketan Mamtora, BMO Capital Markets.

First question, going back to lumber the pricing has surged quite a bit over the last few weeks, as you mentioned. Can you just talk a little bit about how that will impact your business and how it rolls through into your numbers in Q1 and then into Q2?

Sure. I think, as we've talked about before, the absolute level of the lumber market we look at more as a pass-through. So to the extent that we have certain fixed-priced items and certain what we call variable-priced items which are based on the market, we believe we have somewhat of a natural hedge. So you are going to see margin impact on each side of that, and usually they offset each other.

So, if the lumber market stays higher, obviously that's going to have an impact on the overall sales dollars. And from a gross profit percentage, it will have the result of probably reducing slightly the gross profit percentage. But our target, as Mike said, is to make sure that our profit per unit remains consistent.

Got it. Okay. And will it have an impact on your working capital in the first half of the year?

Yes, certainly to the extent that the lumber market is higher and our costs for our inputs are higher, it will obviously increase working capital.

Okay. That's helpful. And turning to your construction business, it was a solid quarter on the residential side of things, up 30%. This is really in excess of housing starts. Can you provide some color on where you are seeing this growth, market share gains? Any color will be helpful.

Yes. I think a couple of things that I would call out are the framing operations. There was a definite increase there. I also think that manufactured housing saw a significant increase as well. So I think just different markets are very strong at the moment, but those are two specific areas I would call out as adjustments that people may not generally look to.

And would you say that winter has been so-so, not as cool, and maybe part of it is driven by that or not as much?

Yes. I certainly think what you see and you have probably seen already, on the retail side, there has been more takeaway simply because the weather is better in a lot of the markets. So we certainly appreciate that, but we are still pretty comfortable with our numbers for the year.

Got it. And then just last one on idX. You mentioned some customer order de-lists. Can you provide some color there on what is causing the de-lists and how comfortable you still are with your target that you put out? It may not be in 2017 but looking out into 2018.

Sure. And I think if you look -- I don't really want to name any specific customers. But you've seen some retailers make announcements recently, and so I think there's some of them that are in a bit of a state of flux that, once they get that sorted out, they well return to order patterns which are more normalized. And we believe, as I said before, that it's nine to 15 months delay.

So how much would you expect -- I know earlier you had provided that $25 million to $28 million guidance for EBITDA. How do you think about it for 2017?

I think that's a really good question, and the way that I'm trying to look at it is to take a look at the Company in total. And, as you look at that and consider our targets that we have tried to lay out in terms of our sales growth target and our EBITDA percentage target and just include them in the group in terms of their overall impact, they are new so we are talking about them and trying to explain that. But in terms of the overall impact, it's not as great on the total.

So, if you just picture the big picture, it will make it a little easier, rather than try to parse individual operations or market segments.

Got it. And then just your for 2017, what are you budgeting?

About $65 million.

Got it. That's very helpful. I'll turn it over. Good luck in 2017.

Kurt Yeager, D.A. Davidson.

You guys had talked about a bit of the growth in the manufactured homes, and I was wondering if you'd talk about any trends as far as the prefab wall panels and tresses. It seems like there's a lot of concerns about labor availability, and I was just wondering if you had seen a pickup in this, or if it's becoming a more attractive alternative?

That's a good question, Kurt, and we have seen a pickup in that area. And any time there's a labor shortage, it becomes more popular to have as much done within our factories as can be done. So we've added capacity over the last 18 months to be able to produce more of those types of products, and the effect has just been very good.

And then on the SG&A side, I know you guys have talked about trying to maybe control the rate of growth in that. So just looking at the $9.2 million to $9.6 million move from 2015 to 2016, do you think you can keep that level as a percentage of sales in 2017, or should we look at that from the $87 million just pure number that we saw in Q4 and then think about that as somewhat of a run rate?

Yes. I think -- I'll have Mike talk a little bit more about the run rate. But one of the things that I've cautioned is that if the lumber market has a disproportionate rise or disproportionate fall, the percentages may not be as meaningful as they otherwise would be if we try to look at absolute dollars. But Mike can add a little more color on that.

Yes. I think when you look at SG&A and you peel off the bonus piece, so SG&A was $87 million, you got to peel off the $10 million of bonuses expense that I called out. If you look at the $77 million in core SG&A, that tends to stay fairly fixed from quarter to quarter. So we might get a bump going into next year, inflationary type pump with raises and things like that that are effective the first of the year. But I think that is a pretty good number for planning purposes.

Okay. And then just circling back on idX, can you just talk about any of the synergies you guys are seeing there or maybe opportunities that you've seen as far as having that business for the first quarter?

Yes. I think we have some obvious synergies on sourcing and supply and other things like that. There are some others that were not quite as obvious to us from a sales perspective and interacting with some of our existing operations. There has really been a lot more touch points and commonality, and we are excited about being able to work together with them to -- for us to help support them and them to help support our efforts. So those are plus surprises, I would say.

And then final one. I believe you guys have talked in the past about some of the SG&A requirements based on segment sales growth, particularly as far as industrial and residential construction. So I'm just wondering, with idX falling into the industrial bucket, do you think that maybe will boost SG&A disproportionately as compared to growth in other areas?

Yes, idX does run at a higher SG&A rate and a higher gross margin, more like what our plants that serve more industrial customers and serve more residential constructions is kind of more commensurate with those rates. So yes, they did provide a lift in both those areas, and they will continue going into next year.

Okay. And then, sorry, a final one. You guys had said that idX wasn't expected to add to profitability in the fourth quarter, and I just wanted to make sure that that was the case or --?

Yes, I think overall acquisitions may have contributed $0.01 to EPS. So it was modest. We knew about the finished goods inventory adjustment that I called out in advance, and I wanted to make sure you knew that number for planning purposes going forward. But yes, it was pretty much what we expected.

All right. Perfect. Thank you guys for your time.

And I'm showing no further questions. I would now like to turn the call back to Matt Missad for any further remarks.

Once again, thank you for your time and your interest in UFP. As you can tell, we are proud of our accomplishments and focused on beating old records every chance we get. We want to be ferocious in our focus to achieve our goal, like a hungry lion in the wild, not like the Honolulu blue and silver kind. Have a terrific day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.