UFP Industries Inc (UFPI) 2018 Q1 法說會逐字稿

Welcome to the Universal Forest Products, Inc. First Quarter 2018 Conference Call. Hosting the call today are CEO, Matt Missad and CFO, Mike Cole. Matt and Mike will offer prepared remarks and then the call will be opened up for questions.

This conference call is available simultaneously and in its entirety to all interested investors and news media through our webcast at www.ufpi.com. A replay will be also available at the website through May 19, 2018.

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 the company's expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in the press release and in the filings with the Securities and Exchange Commission.

At this time, I would like to turn the call over to Matt Missad.

Thank you, Ayla, and good morning, everyone. Welcome to our first quarter 2018 conference call, where we say, "good golly, Miss Molly, what a great quarter." We like to think that it can't rain on our parade, but this morning we woke up in Michigan to a blanket of snow. But even a mid-April snow won't dampen our enthusiasm. It's just another hurdle we will overcome to reach our 2018 goal to be greater than before.

Simply put, we need to produce our best year in UFP's 63-year history in 2018. And we are off to an excellent start.

I'm very proud of our UFP family members, who were able to post new first quarter records for sales and profits. We had some tailwinds like the gain on sale of our Medley, Florida property and a lower federal income tax rate, yet we also had some headwinds like higher transportation and labor costs. Even without the tailwind items, we produced record results from operations. Let's do a quick review of the quarter.

Sales were a record $993.9 million for the quarter versus sales of $856.8 million (sic) [846.1 million] in 2017. If only we had an extra $6 million in sales because $1 billion has a much nicer ring to it. We also were encouraged with our overall 9% unit sales growth in the quarter. Earnings were a record $0.53 per share for the quarter versus $0.34 per share in 2017.

Our earnings include both the headwinds and the tailwinds I mentioned and Mike will give you more details in his report.

Gross margins were down 110 basis points from 2017. The bulk of the difference is related to the higher average lumber market pricing.

Gross profit dollars were up $10 million and were in line with our unit sales increases. New product sales were $103.9 million, up from $86.2 million a year ago. We are slightly behind our target year-to-date, as sales in the north and parts of the west are behind schedule, primarily due to weather conditions. We still believe that we will be able to achieve our annual target of $450 million in new product sales.

A quick review of the lumber market shows that pricing in early Q2, it still is trading at the higher levels we saw in Q1. Q1 of 2018 saw the composite lumber market as much as 20% to 25% above 2017, while the Southern Yellow Pine market was generally up 7% to 10% over 2017 numbers.

Panel goods are off slightly from their recent levels, and we believe the new capacity coming online will further normalize pricing levels in the next 2 quarters.

Rail service and truck transportation remain as wildcards to pricing because of transportation equipment and service shortages. These factors will require us to carry higher levels of inventory to meet our customers' needs.

By market, as we look at the retail sales market, the repair and remodel market is still robust and continues to fuel our retail sales. Weather held back sales in certain markets, but our retail unit sales growth was 10%, which included 7% unit growth attributed to acquisitions.

The construction market is also solid for those geographic markets we serve. Unit growth in construction was 6%. And our industrial customers appear to be gaining strength as well, which creates opportunities for us to add more value. Unit growth in industrial was 11%, of which 4% was acquisition related. Our recently completed acquisitions of Spinner Wood Products, Great Northern Lumber, Expert Packaging, Silverwater Box and Fontana Wood Products as well as our recently announced acquisition of North American Container Corp. demonstrate our commitment to grow the industrial market. The annualized sales for these operations were approximately $120 million in 2017.

In the new products arena, we are seeing very strong growth in our UFP-Edge product family. These interior decor items are on-trend with both smooth and rough sided shiplap options for accent walls, fireplace surrounds, entertainment centers and other design elements, such as furniture items. Coupled with our laminated and appearance-based panels, we continue to expand our interior, home and business product offerings.

We also introduced our Deckorators porch flooring. This is a new product, which we will use for our transition market between the indoor and outdoor living spaces. We're also offering custom-designed and manufactured high-end hardwood tables, both solid sawn and Edge glued. And these are being produced on a limited basis in our LX facility. And our Vault decking products, in addition to being the best decking product on the market, also make an excellent dock surface, since they don't absorb moisture.

Our international business continues to grow. In early April, we completed a small acquisition of Expert Packaging. They produce highly specialized product offerings, including special crating for animals. This acquisition continues to expand our new product offering in the Greater Sydney market and is our fourth acquisition in Australia. In Mexico, we added new operations in the El Bajio region near Querétaro and in Monterrey. We look to establish another operation in Guadalajara later this year.

And while we prefer to acquire a company with excellent people and operations, we must maintain our ROI focus. So if the valuations are too high, we will continue to grow with greenfield-type locations. As an example, we recently completed the purchase of land and building in Orangeburg County, South Carolina to better serve our South Carolina-based customers. This, coupled with a property we expect to obtain via our acquisition of North American Container, will allow us to move all South Carolina customers' production to the State of South Carolina, reducing freight cost and freeing up space in our North Carolina operations to facilitate their growth.

It will also allow us to consolidate production in facilities where it makes the most economic sense.

We also expect to add facilities in Northern Nevada and in South Florida in the coming months. And we continue to make good progress at idX. They have consolidated production and are in the process of subletting 2 facilities. When the subletting is accomplished, it should reduce their cost by almost $5 million annually and is built into their current forecast. Their first quarter 2018 results were in fact slightly better than planned. In addition to the greenfields, we remain actively in pursuit of acquisition opportunities.

We have a healthy pipeline of target companies and are maintaining our ROI-based purchasing model. We are looking at targets, which grow our current markets and which add scalable new product opportunities. We plan to sell these new products to our customers through both their brick-and-mortar outlets or through e-commerce channels. And our e-commerce sales are growing nicely, and we are continuously adding more products to the portfolio. We have a special focus on targets, which help us broaden our ability to offer more packaging solutions and to better utilize mixed materials. North American fits that profile.

Finally, we're making progress on limiting our SG&A costs. In the first quarter, we met our expectation of keeping our percentage growth and SG&A cost below the percentage growth in unit sales. And our new internal model of allocating SG&A cost will certainly help us meet this goal long term as well.

Now I'd like to turn the call over to Mike Cole to provide other details on our financial performance.

Thanks, Matt. I'll start out with the highlights from our income statement. Overall sales for the quarter increased 18%, resulting from a 9% increase in unit sales to go along with the 9% increase in selling prices due to a higher lumber market. Organic growth contributed 5% of our unit sales increase, while acquisitions contributed 4%. We believe weather had an impact on organic growth this quarter and are hopeful that volume is made up in Q2.

Breaking down our sales by market. Sales to the retail market increased 19%, resulting from a unit increase of 10% and an increase in selling prices of 9%.

The Robbins acquisition completed in March of 2017 contributed 7% to unit growth. Consequently, organic growth was about 3%. New products were a prominent driver of organic growth this quarter, and also helped to contribute an increase to our retail gross profits. Our sales to the industrial market increased 19% driven by an 11% increase in unit sales and an increase in selling prices of 8%. Acquisitions contributed 4% to unit growth.

Organic unit growth was about 7% and was driven by adding over 300 new customers and 46 new locations of existing customers, as our efforts to improve market share continue to gain traction and customer demand continues to be strong. Our overall sales to the construction market increased 16%, due to a 6% increase in organic unit sales and an increase in selling prices of 10%. Within this category, our unit sales increased by 10% to manufactured housing, 3% to residential construction and 5% to commercial construction customers.

Moving down the income statement. Our first quarter gross profit increased by $10 million or over 8%, which is in line with our increase in unit sales as challenges associated with rising lumber prices, freight costs and labor rates were offset by a variety of factors, including acquisitions, which contributed $2.3 million of our increase. Other drivers include improved profitability on industrial sales, as higher lumber prices have been more effectively passed on in our selling prices this quarter than they were last year; solid organic sales growth for industrial manufacture housing and commercial construction markets and new product sales growth, which gives us a good margin lift, especially on retail sales.

Continuing to move down the income statement. SG&A expenses included $9 million of accrued bonus expense, up nearly $1 million from last year, resulting from an increase in earnings from operations. The remaining core SG&A expenses totaled approximately $84 million compared to $79 million last year. This $5 million increase was driven by acquired businesses, which contributed $1.5 million to the increase, along with a $2.4 million increase in wages and related costs and $1 million increase in sales incentives tied to higher gross profits. Operating profit, excluding the $6.5 million net gain on the sale of assets, we discussed in the press release, increased by $3.7 million or 11%.

Likewise, the EBITDA for the first quarter increased by $6.6 million or over 14%, as acquired businesses contributed $1.1 million to EBITDA growth. Overall, we were pleased to see our year-over-year profit per unit improve in spite of rising costs as our 14% growth in EBITDA surpassed our unit sales growth of 9%. Our effective tax rate this quarter was 22% compared to 33% last year, primarily due to the impact of the change in tax law and certain tax deductions related to the first quarter. We still currently estimate an overall expected tax rate of 25% for the year.

Moving on to our cash flow statement. Our cash flow used for operating activities was $84 million for the quarter and was comprised of net earnings and noncash expenses of approximately $42 million, offset by a $126 million increase in net working capital since year-end, driven by the seasonality of some of the markets we serve and higher lumber prices. As I've mentioned on previous calls, we measure our cash cycle to assess our working capital management and we're pleased to report our cash cycle for the first quarter decreased to 57 days compared to 59 days last year, due to a decline in our days' supply of inventory.

Investing activities consisted of capital expenditures totaling $24 million for the quarter, including expansionary CapEx of almost $7 million. Net proceeds from the sale of our Medley facility totaled $35 million and almost $9 million was spent to acquire Spinner Wood Products and Great Northern Lumber. We also announced 3 additional acquisitions that are closed or expected to close in the second quarter, Expert Packaging, Fontana Wood and North American Container.

Financing activities primarily consisted of $117 million in net borrowings on our revolving credit facility to finance seasonal working capital. We also repurchased $850,000 of our stock in Q1. As a reminder, our practice has been to buy back stock opportunistically when the price makes sense to offset stock-based compensation issuances.

With respect to our balance sheet, our net debt balance was about $266 million compared to $246 million last year. Overall, our balance sheet remains strong and we believe we could add $250 million to $300 million in debt to continue to grow our business and still feel comfortable with our leverage and capital structure. As we've discussed in our previous calls, our highest priorities for use of cash continue to be capital expenditures and acquisitions at this time.

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

Thank you, Mike. Now I'd like to open it up for any questions you may have.

(Operator Instructions) And our first question is from Ketan Mamtora with BMO Capital Market.

First question, can you talk a little more about what you are seeing in the lumber markets? We've started to see some easing in the Southern prices, but the Western grades remain strong. So can you just talk at a high level kind of what you guys are seeing?

Yes. I think the market is very, very product specific at this point. There are some products that are in short supply, there's others where there is little more availability. So it's tough to kind of give a good overall view. But if we just kind of look at the Random Lengths Composite Index and the Random Lengths Southern Yellow Pine Index, they're trading fairly stably overall in a reasonably narrow band of $10 to $20 per 1,000. So at least right now it's going to - it seems as though demand is somewhat equal to supply. There are some shortages in different products, like I said, but there is also some other products where it's not as tight. So I know that's probably not helpful, Ketan, but that -- the market is kind of what it is right now.

Okay, understood. And then just one other question. How much was, in rough numbers, was weather a drive on organic volumes in Q1 that you think you all can recoup in the second quarter?

Yes, that's an excellent question. And I'm not sure I'd have a great answer for you there, it's a little bit of a prediction. But -- we would have expected a little bit more organic growth in the repair and remodel market in certain areas and certainly, in the construction markets were heavy, which the Northeast is one of those areas where we know that jobs were pushed back due to weather. So I can't put a specific number on it for you, but those are the areas where, I'd say, the biggest concentration was.

Got it. And then you have also mentioned that in the first quarter there was -- the pass through of higher lumber prices was better than what it was in the first quarter of last year. What drove that? Have you all made any changes, or is it the mix, or the way contracts are structured?

Yes. I think there's a couple of factors there. One is, there was a little bit of catch-up in terms of the rapid increase in the market over the past several months leading up to this year. It was tough to kind of catch up on your cost pass-throughs. They've been a little more rationalized the last couple of months. The other part is, I think, the duty a year ago, and the anticipation of that caused a pricing spike that was tough to catch up to.

Got it. And then any update on the CapEx target for 2018. I know last quarter you all said $85 million?

Yes, $85 million still looks like the right number.

And our next question is from Steve Chercover with D.A. Davidson.

So I guess, I'll start kind of big picture and then drill down a wee bit. But can you talk about the demand trend across your 3 business line? And does -- is there a point where the high lumber prices start to actually crimp demand?

Yes. I'll try to take the first question first. As we just kind of quickly -- as we look through the different markets, I would say, repair and model -- remodel, which was kind of our focus for what we think the retail market's going to look like, that's high- to mid-single digit kind of growth rate. So we feel very comfortable about that. Construction market, we typically undershoot what some other groups look at in terms of what the new housing starts are going to be. But we still see that as positive single-digit growth, maybe mid -- low-to-mid. And for us, in the markets we serve, I think that's a very realistic view. And then on the industrial side, we're seeing an increase in strength there. So we still see us being able to outperform kind of the durable goods manufacturing index and some of those other areas because of what we're pushing for in those markets. So the second part of your question, which is, is there a point at which lumber market pricing crimps or impacts demand. There certainly is, and as with anything, we always look at affordability of housing units and the type of units that are built. We still believe there is a housing shortage overall, but, obviously, the combination of interest rate increases and not just lumber, but all commodity price increases would certainly impact that demand. I think given the level of the lumber market today, that's not the most significant driver in that equation yet. If it goes up another couple hundred bucks or thousand, we definitely would see a difference in that viewpoint.

Yes. And how about labor? I mean, are you having difficulty tracking labor to your facilities? And does labor become a governor on economic activity, particularly house -- homebuilding?

Yes. I think labor is one of those things that is certainly a potential throttle. And what I think it's helped do is, it's helped keep the industry from, perhaps, overbuilding and it's kind of helped modify what normally happens in the marketplace. So I think that's actually helped prolong the growth and it's prevented overbuilding. So I think in that sense it's a good thing. Certainly, everywhere you go, people are struggling to find good, hard-working employees. We're very fortunate to have the good hard-working employees that we do have, but trying to recruit and retain others is always a challenge. And that's why we're looking at spending more money on automation and other processes that make our jobs easier. So I think that will certainly help us as we move forward. Ironically enough, it appeared from the jobs report that perhaps there was up to 50,000 construction jobs that were lost in the prior month. I don't know if that's an aberration. I would assume maybe it's weather-related or something. But -- so that was kind of an unusual quirk that I saw.

Got it. Okay. And then I'll get in a little more granular. Packaging appears to be an attractive segment for you. So maybe you can just expand on what's making that so attractive? And what advantages you bring to the table?

Yes. I think for us it's the ability to design and engineer packaging solutions, which sets us apart. And for us to be able to provide more value to the customer by utilizing different materials based on their design properties and their respective and relative costs, that gives us a unique position. We've also observed over the years that there are a number of other products, which would be fairly straightforward for us to supply to our existing customer base. And as they look at consolidating the number of suppliers that they have, it's a very logical choice for us to be able to supply all of their packaging needs. So obviously that's at the early stages, but we feel very comfortable and confident that, that's a good area for us to grow in.

Is part of your secret sauce, I think, what you used to refer to as your whole log capabilities or your ability to use residuals from one process, perhaps truss manufacturing and take the little end pieces and use them elsewhere, is that the heart of it?

That certainly is a component of it. And again, we want to extend it to other materials and have that same kind of impact across our different business units.

Okay. And with respect to the acquisitions, are the margins pretty similar to what you're currently generating in your legacy business?

I'll have to let Mike answer that.

Yes, collectively, I think that's a fair statement. Very similar.

Okay. And then just one another quick question. I think you said you bought $150,000 worth of stock and that your objective is really to offset stock-based compensation. But in our view, the stock got pretty darn cheap in the first quarter, maybe puzzling cheap. Would you be more aggressive if you thought that your own company was as compelling or more compelling with less integration risk than other opportunities out there?

Yes, those are all good points, Steve. The number was actually $850,000, is what we bought back, not $150,000. And Q1 is difficult for us because the trading window we have is so short. We released near the end of February and then we can't trade in our stock 2 weeks before the end of the quarter. So it's very short trading window.

(Operator Instructions) Our next question is from Dan Jacome with Sidoti & Company.

Just couple of quick questions. First on the new products. Been pretty impressed by the momentum you've been seeing there the last couple of quarters and sorry, if I missed it, but did you comment on how the Deckorators is doing? And then if you did, just wondering how much of the strength is coming from the Vault product? And then I think you mentioned in the past, you have like a new aluminum railing product and then, of course, the [shard] wood. I mean, those are the ones I've been kind of trying to track call to call. So wondering if there is an update there?

Yes. And that's a great question, Dan. One of the things we tried to call out in the press release is, if you look at us in that $4 billion neighborhood of overall sales and you look at each individual new product, you would look at it and say, boy, we sold $1 million of that product, that really doesn't move the needle much. But that's why we need to keep pushing and we are for such a large number of new products. So individually they may not be material, but the products that you mentioned are all doing well and the Deckorators family, although I'm not going to call out individual products and their individual sales, I will say that the Deckorators family is doing an outstanding job overall of introducing new products and helping drive their growth. And I did call out the UFP-Edge as well and they're doing a great job too.

Okay. Okay, understood. All right. Great. And then had a question, wondering about -- I think there has been a lot of consolidation recently on the distributor side of lumber products. I'm not sure if you have very high level of thoughts on that or maybe in some way they might impact your business at all, anything there?

Yes. I think you might be referring to the BlueLinx-Cedar Creek combination...

Yes, I am. And there was another smaller one the day after, but -- I was just curious, yes.

Yes. I think there is -- obviously, there is changes happening in the marketplace all the time. It's a very dynamic situation. I know just being a pure distributor has been a struggle for a number of companies. And I think increasing their volume and scale will certainly help them. So I wish them well with their (inaudible).

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

Well, I'd like to thank you again for joining us on the call this morning. We truly appreciate your interest in our company and believe that we have an outstanding team committed to driving performance and increasing the value of our investment. With more hard work, good execution and a reasonable economy, at the end of 2018, we hope to channel the late Harry Caray and say, "Holy cow, 2018 was better than before." Thank you, and have a good day.

Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect. Everyone, have a great day.