UFP Industries, Inc. (UFPI) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 2014 Universal Forest Products Inc. Earnings Conference Call. My name is Mark and I'll be your operator for today. At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today, Lynn Afendoulis. Please proceed ma’am.

Good morning and welcome to the Universal Forest Products Incorporated Fourth Quarter 2014 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 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 for the next month. Before I turn the call over to Matt Missad, let me remind you that yesterday's press release and today's presentations made by our executives 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 and good morning, ladies and gentlemen; wanted to thank you very much for taking the time to join us on our fourth quarter 2014 conference call. I want to start out the call by saying congratulations and thank you to the employees of the family of Universal Companies who posted the best results since 2006. I would also like to wish Universal Forest Products a happy 60th birthday. What began as a lumber wholesaler in February of 1955 continues to become stronger today; thanks to the foundation built by the founders and previous leaders of our company. They provided a great springboard to grow from their fundamental approach to business was one of the trading lessons, which helped us lead dramatically approved results in 2014 and as good as the performance was in 2014, we know we must be better in 2015 and beyond. But before I gauge too much into the future, let's do a quick review of our key indicators for our 2014 performance. Starting with sales, sales for the fourth quarter were up nearly 18% to $628 million. Each market showed positive sales growth. Retail was up 22%, construction up 10% and industrial up 24%. For the year 2014, sales were up 8% in spite of a very slow start to the year when first quarter sales were flat compared with 2013. The increase for the last three quarters of 2014 was 10% better than 2013 with growth accelerating through Q4. Overall for the year, retail sales were up 10%, construction was up 2% and industrial was up 12%. Our gross profit dollars were up $8.5 million for the quarter, a 13.3% increase and up $44.8 million for the year, an increase of 16%. Gross margin however declined for the fourth quarter to 11.7% due in part to additional R&D expenses for new products and product change over cost and our composite decking program to help position us for 2015. Early winter weather in November also caused many production inefficiencies, which impacted margins. Overall, EBITDA margins for the quarter were 4.5% and for the year were 5.2%. Our objective is for EBITDA margin to range between 5% and 6% of sales and we achieved the low end of that range in 2014. Our other metrics, we look at on a current basis rather than at yearend. Currently our account receivable are 88.7% current, which is an improvement from last year at this time of 84%, but we still have significant room to improve here. Our inventories are up from yearend in anticipation of a heavy spring selling season and due to position of purchases related to certain fixed price contracts. As we look at the lumber market, prices for southern yellow pine are very close to last year's level, while the composite lumber index is about $40 per 1,000 boards lower than last year. The market will be impacted by housing starts, mill production and foreign purchases of North American logs and dressed lumber. Based on what we hear in the marketplace, the market pricing should not be significantly different than last year, but that is always difficult to predict. Panel products, specifically OSB remain at low price levels and will need either production shutdowns or curtailments or sizeable increases in housing starts to alleviate the oversupply situation. Now I would like to review some of our strategic priorities for 2015 and beyond. Our new product sales initiative continues to gain traction. For 2014, our new product sales reached $149 million, without much help from our EOTech technology, which has launched industrial products, but has not generated much volume yet in the traditional building products. With two new distributors taking the product to market this year, we will be looking for dramatically improved volumes in the building products area. With the numerous additional new products we will launch this year, we expect to achieve nearly $190 million in new product sales in 2015. That should put us well within reach of our goal of $250 million in annual new product sales by the end of 2017. Personnel was our next key area and it's always a strategic priority for us. We continue to build our team and have gained many great employees through our recent acquisitions. In addition, our homegrown talent continues to tap on new challenges. Due to our extensive trading, we've been able to promote numerous of our talented Managers to General Manager positions and Operating Vice President positions and that will help us manage out the aggressive growth plans and to accelerate more talent development. We're aggressively recruiting new talent to ensure proper depth and succession planning. While it is difficult to find hardworking and talented individuals, we know that that is the key to our future success and we certainly welcome any referrals you send our way. Wages and benefits continue to rise as Mike will describe and we have incurred additional non-value added employment cost and regulatory charges including an estimated $2 million annually for cost related to the so called Affordable Care Act and its related regulations. However, we remain very confident our team is the best in the industry and we will overcome these challenges. On the acquisition front, we were able to close on five acquisitions in 2014, which we expect will add well over a combined $100 million in sales in 2015. We continue to look for targets which meet our need to expand geographically and with more value added products and services. We've added two new companies already in 2015 as well and we expect to gain synergies from the new capabilities of all of the companies we've acquired. On the international front, one of the companies we acquired in 2015 was Integra Packaging in Brisbane Australia. Integra is an industrial timber packaging and alternative material supplier to original equipment manufacturers and shippers in Australia. We look to capitalize on the multinational customers operating in North America and Australia to grow our businesses in both of these markets. We will continue our search for good partners globally, but will avoid permanent investment in countries where current geopolitical conditions make operating a successful business very difficult. Russia and Middle East are prime examples and unfortunately, Brazil has been trending in the wrong direction as well. Many of you are probably aware of the transportation challenges in our country from the problems at the ports on the West Coast to lack of available equipment and drivers in the trucking industry. While fuel pipe prices for diesel have seen a small decline, the potential savings has been offset by driver cost, annual equipment regulations and lack of available and competitively priced third party resources. Fortunately, our transportation company continues to get the job done in some tough market conditions and we expect them to ensure our customers will receive their products on time. As you can tell, we're very excited about our prospects going forward and have great enthusiasm for our team. With our growth initiatives, our new products and services, our growth via acquisition and organically, we're confident we will continue to grow our sales at a rate of four to six percentage points above positive U.S. GDP growth over the next several years. With a still fragile economy, we still need a broader recovery to help us achieve these long term targets. Now I would like to turn it over to Mike Cole, our Chief Financial Officer to review in more detail our financial performance and condition.

Thanks Matt. Before reviewing the financials, I should briefly address the impact of the lumber market this quarter. Overall lumber prices were down almost 4%, but prices for southern yellow pine, which is a higher percentage of our volume were up almost 10% for the quarter and drove an overall increase in our selling prices. Now I'll move on to some income statement highlights. Overall sales for the quarter increased 18% due to a 14% increase in unit sales, combined with a 4% increase in prices. By market, sales to the retail market increased 22% driven by an 18% increase in units. The unit sales increased primarily due to improved consumer demand. We had strong sales growth to each of our big box customers, which collectively grew by 25% this quarter, while sales to other retail customers increased 19%. Our sales to the industrial market increased 24%, which included an 18% increase in unit sales. Recently, completed acquisitions drove about 6% of our unit increase, while the remaining 12% unit growth was primarily driven by better demand and gaining share with existing customers. Our overall sales for the construction market increased 10%, consisting of a 7% increase in unit sales and a 3% increase in prices. Our greatest unit sales growth continues to be experienced with customers that buy concrete forms as we continue to gain share. Our unit sales to manufactured housing in residential customers increased by 3% and 4% respectively. By comparison, HUD-code home production increased by about 5% for the quarter and year-over-year national housing starts increased by about 8%. Moving down the income statement, our fourth quarter gross profit increased by 13%, but dropped by 50 basis points as a percent of sales. This decline in gross margin was due to an increase in unfavorable cost variances we experienced at many of our locations, which was primarily weather related in HUD productivity. SG&A expenses increased by $6.9 million or 14% due to $5.1 million increase in wages and benefits primarily related to new operations and headcount and a $1.7 million increase in incentive compensation tied to profitability. Overall, we're very pleased to report a 16% increase in our earnings this quarter. Moving on to our cash flow statement, our cash flow from operations improved by $19 million for the year and was comprised of net earnings and non-cash expenses totaling about $101 million offset by a $28 million increase in working capital due to our growth for the quarter and anticipated growth into 2015. Investing activities included capital expenditures of about $45 million, including expansionary CapEx of $9 million primarily associated with investments in new products and expanding our capacity and capabilities to serve industrial customers. Investing activities also included about $35 million of payments for previously announced acquisitions. Finally, cash flow from financial activities included $17 million related to dividends and repurchases of our stock, which we plan to continue in 2015. With respect to our balance sheet, at the end of December, our revolving credit facility had over $271 million in availability after considering letters of credit. Our balance sheet continues to be in great shape and we believe we could add over $130 million in debt and still feel comfortable with our leverage and capital structure. That's all I have in the financials Matt.

Thank you. Mike. Now I would like to open it up for questions.

[Operator Instructions] Your first question comes from the line of Steve Chercover from D. A. Davidson, Please proceed.

Good morning, Hi Matt.

Good morning, Steve. How are you?

Hey Mike. So you say you've got locked your goals for 2015, can you be specific? You don’t need to be too granule, just sales gross margin and EPS?

Well as soon as we decide to give guidance, Steve you will be the first among many to know.

Okay, but seriously you said, sales should grow 4% to 6% above GDP and your target EBITDA margin is 5% to 6% of sales?

Correct.

And you have a GDP growth assumption?

We think it will be somewhere between 2% and 3%.

That sounds reasonable. Okay, and then you said $190 million of new product sales will be achieved like is that a run rate or that’s -- you'll get that?

Well, that is our goal for this year. We’ll have that for annual new product sales in 2015. We did a $149 million last year. So it’s about $50 million in growth this year.

Okay, and what are those products?

Probably about 79 different products and we’ll probably adding over 50 additional ones this year. They range all across the spectrum of our markets and it can be anywhere from retail, building material type items to industrial products, to products for the construction market.

That can be things that you fabricate or add value to or are they sourced elsewhere?

It’s both, but the ones who we're really trying to focus on are things that we add values to.

Yeah, and then last year we had the Polar Vortex, seems like you guys are getting some pretty harsh weather now. Are we going to be hearing about that on the Q1 call or is this pretty well a normal winter?

Yeah, I guess so far I’ve learned not to make weather predictions Steve. So I think the whole idea is right now it’s certainly a manageable situation. Depends on what happens over the next six weeks or so.

Yeah, so it just sounds like with the exception of maybe Boston and up into Maine, it’s just winter, its cold -- actually it delays everyday or every quarter.

All right. That’s all I have got. Thank you.

All right. Thank you, Steve.

Thanks Steve.

Your next question comes from Jay McCanless from Sterne Agee. Please proceed.

Good morning, everyone.

Good morning, Jay.

Okay. So the first question on the gross margin I missed, I think you said you guys were talking about stocking program for composite lumber, but then also there were some weather impact on gross margin. Could you reconcile those two and if you pull the weather stuff out of it, what should the gross margin have looked like?

I think if you just look at it in aggregate Jay, there’s about $3 million or so in additional unfavorable cost variances for the quarter, which are due to a lot of different factors, the ones that Matt had mentioned earlier in the call and weather are the biggest.

Okay. The three main cost variances okay. And then the second question on the big unit sales gain to the big box retailers, is that -- is the majority of that just a easy comp, because of the weather last year or is it the retailer actually taking more product and stocking deeper. And then the second part of that question is, are you guys actually gaining shelf space at some of the big box retailers?

Yeah, just from a high-level standpoint Jay, I think what we’re seeing the big boxes did better last year. Their year-over-year comps for our products were better than they were. So that’s a big part of it. And obviously we’re continuing to try to pick up share overall. So we expect that trend to continue.

Okay, and in terms of weather comparisons this versus last year, do you think any of that was -- any of that was 24% increase in unit sales to the retail segment or excuse me, 18% gain, was any of that just a weather comp?

Yeah, some of it certainly could have been, but I don’t think there’s a big portion of that and we’re referring right now to the fourth quarter of 2014 versus the fourth quarter of 2013 right.

Right.

Yeah, I think the weather comp issues will be different for first quarter. We don’t -- we can’t really predict that yet, but…

Got it, okay. And then on the HUD-code side, are you seeing any new entrants into that market, new customers and is the impact of the customer or the financial impact from the customer who decided to vertically integrate some of their operations, is that pretty much done now?

Yeah -- the second question, the answer to the second question is yeah, that's pretty well baked in now. The first part of the question, we did have one customer that actually added capacity opened up in a previously shuttered facility, but there’s not a ton of that going on that we can tell.

Okay, great. Thanks guys.

Thank you, Jay.

I would now like to hand over to Matt Missad, for closing remarks.

Well, thank you. As you can tell, we have a very strong balance sheet. We have a diversified capital plan, which balances short term and long term shareholder returns through dividends and buyback programs. We also are using our capital for maintenance, expansionary and innovation capital investments together with targeted acquisitions to strengthen our customer relationships, our positions in the markets we serve and our expansion of new products and services. Obviously, I am very proud of our universal family of companies and the people who drive our business. Their enthusiasm is contagious. They are shareholders who want better results and they have the talent and ability to achieve them. Thank you again for your time and investment in UFP. And while, as a lifelong lion's fan I might trade one super bowl victory for seven feet of snow. Let's hope for a break from the severe weather for our friends in New England and well along the East Coast. Thanks and have a great day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.