UFP Industries, Inc. (UFPI) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Quarter One 2015 Universal Forest Products Incorporated Earnings Conference Call. My name is Tracy and I'll be your operator for today. At this time all participants are in listen-only mode. We will conduct the question-and-answer session towards the end of this conference [Operator Instructions]. I would like now to turn the call over to, Lynn Afendoulis, Director of Corporate Communication. Please proceed ma’am.

Thank you. Welcome to the Universal Forest Products Incorporated’s First Quarter 2015 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 Web site through May 17, 2015. 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 this call over to Matt Missad.

Thank you, Lynn and good morning, ladies and gentlemen. I’d like to thank you for taking the time to join us on our first quarter 2015 conference call. We are walking on sunshine today and feeling very-very good about a terrific first quarter result. Thank you again to the employees of the Universal family of companies for continuing to deliver outstanding performance. The quarter itself was a bit of a rollercoaster ride; January was good; February was a struggle, due in large part to weather issues; and March was a record profit month of UFPI. Let's take a look at our key indicators. Starting with sales, first quarter sales were $633 million, a 14.4% increase over 2014. Sales increased in each of our end-markets, with retail up 14.4%, construction up 5.9%, and industrial up 23%. The sales increase greatly exceeded our stated target of 4 percentage points to 6 percentage points more than positive GDP growth. Moving to the lumber market. The overall lumber market trended down throughout most of the quarter before firming up the last two weeks of the quarter. SPF remained at a lower level and it fell more than Southern Yellow Pine. While Southern Yellow Pine declined during most of the quarter, it recovered by quarter-end. Year-over-year pricing, Southern Yellow Pine was up slightly from 2014, while SPF remains well below prior year pricing levels, and OSB and other panel products, but primarily OSB still is well below historical price levels and absent significant improvement in demand or a reduction in supply, pricing for OSB should remain low. Gross margin for the quarter was 12.57% versus 11.92% in 2014. This was a good improvement for the quarter over a somewhat weaker period in 2014, and improved product mix, coupled with improvement in our trending performance, helped make this comparison. The EBITDA goal of 5% to 6% for the first quarter EBITDA was $28.5 million, an increase of $7.25 million or 34.1% over 2014. EBITDA percent for the quarter was 4.5% compared to 3.8% for the same period in 2014. While this is below our target level for the quarter, the latest 12-month EBITDA percent was 5.2% versus 4.2% a year ago. This is a nice improvement for us. Inventory is up dramatically and remains an area of opportunity for improvement. We have built-up inventories in anticipation of a strong selling-season, and have also added to our safety stock to guard against transportation delays, as well as customer requirements which may outstrip even their own projections. Total inventory was $404.7 million at quarter-end versus $312 million in 2014. As a percent of March sales, it is a 176% this year versus a 148% in 2014. This is an area we will continue to focus on. Accounts receivable, as you know, our goal is to have accounts receivable 95% currently -- we currently stand at approximately 93% current. Now I'd like to review some of our strategic priorities for 2015 and beyond. Our new product sales for Q1 were $38.5 million versus $29 million in 2014. That's a 32.8% improvement. We have launched 10 new products thus far in 2015 as well. Our decorated product line continues to grow as we add new decking and related accessories to the product line. ProWood Dura Color also is continuing to grow in our selected markets. Our EoTech technology has made good strides with a superior exciting product for agricultural buildings, and we continue to strive to add more specifiers for this technology. With the numerous additional new new products we intend to launch, we expect to achieve nearly $190 million in new product sales in 2015, and we are well on our target. Personnel recruitment, retention, and development is a key for us. We currently have 24-individuals enrolled in our executive management program. Over the next few years, we expect that most of these individuals will be prepared to take on key operations roles. We also continue to add production and sales trainees to fuel our growth initiatives. And through acquisitions, we've added more talented employees who will help us grow and improve profitability. Our succession planning has improved as we identify and cultivate the next group of leaders throughout the Company. Despite line of strong employees is critical and will allow us to backfill for planned retirements, as well as the recent tragic loss of one of our talented operations officers, Chris Joseph, a 29-year employee who died suddenly in an accident. Our thoughts and prayers continue for his spouse, his children, and his extended family and friends. He was loved by us all and will be greatly missed. Moving to acquisition growth. As we mentioned in February, we have added two new acquisitions so far in 2015 and continue to pursue several potential targets both domestically and internationally. We are focused on more value-added opportunities and product-line extensions and adjacencies, which will enable us to better serve our existing and future customers. In addition to filling in geographicals in the U.S., we also see more growth available in Mexico and Australia. And our international sales effort itself continues to grow, which includes both products produced in the U.S. and sold elsewhere as well as products produced outside of the U.S. and sold in other countries. We are also growing our very modest online sales presence through our customers’ Web sites. We continue to see more opportunities to provide better value to our customers and to consumers through the strategic use of the online sales channel. Transportation will continue to be tight in 2015. The strike on the West Coast has ended but it will be a few more months before things get back to normal. In addition, it is the busy season for flatbeds and tractors, so we will need to be well prepared to avoid supply-chain issues. With all of the opportunities and challenges, these are exciting times for the companies of Universal. We look forward to seizing the opportunities and overcoming the challenges to meet our goals. I have great confidence in our employees and their ability to excel. 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 to the lumber market this quarter. Overall, lumber prices were down over 9%. However, prices for Southern Yellow Pine, which is a high percentage of our volume, were up almost 2% for the quarter year-over-year. Consequently, lumber prices had an insignificant impact on our overall selling prices and sales levels this quarter. Moving on to some income statement highlights. Our overall sales for the quarter increased 14% due to an increase in unit sales as selling prices remain flat. Unit sales increased resulting from a combination of organic and acquisition related growth, as businesses we acquired since Q1 of last year contributed 5% to our overall unit growth, while our organic growth totaled 9%. By market, sales to the retail market increased 14%, driven primarily by an increase in units shipped. Unit sales increased due to a combination of market share gains, improved demand, and our new product sales initiative. Our overall sales growth to big-box and independent retail customers was also well balanced, and grew 14% and 15% respectively. Our sales growth to the industrial market increased 23%, driven by a 22% increase in units. Recently completed acquisitions drove about 14% of our unit sales growth this quarter, while the remaining 8% organic growth resulted from share gains with existing customers and adding new customers. Our overall sales for the construction market increased 6% due to higher unit sales. Our greatest unit sales growth continues to be with customers that buy concrete-forms as we continue to gain share. Our unit sales to manufactured housing and residential construction customers increased by 5% and 2% respectively. Moving down to income statement. We’re very pleased to report our first quarter gross profit increased by 21% and over 60 basis points as a percentage of sales. The increase in our profitability in margin this quarter was driven primarily by our operations that serve the industrial and construction markets and reflects efforts to continue to improve our capabilities and product offering, as well as efforts to be selective in the business we pursue. Businesses we acquired since Q1 of last year, also contributed to our margin with this quarter. SG&A expenses increased by $7.8 million, or roughly 14% and remained flat as a percentage of sales. Approximately $3 million of this increase was due to expenses added related to new operations. By expense category, our overall increase in SG&A included a $4.2 million increase in wages and benefits and a $2.4 million increase in incentive compensation type profitability. Overall, we’re very pleased to report a 41% increase in our operating profits and net earnings this quarter. I also want to point out that recently acquired businesses contributed almost $0.05 per share to our net earnings. Moving on to our cash flow statement. Our cash flow used in operating activities was $51 million this quarter and was comprised with net earnings and non-cash expenses of about $21 million, offset by $72 million increase in working capital due to the growth -- due to our growth for the quarter and anticipated growth in the second quarter of 2015. Investing activities included capital expenditures of about $15 million, which included expansionary CapEx of over $6 million. We still plan to spend approximately $45 million on capital expenditures for the year. With respect to our balance sheet, at the end of March, we had a $102 million outstanding on our revolving credit facility at total availability of $295 million. As a reminder, the increase in our revolver since year-end, is simply due to our seasonal increase in working capital, which will then decline throughout Q3. Our balance sheet continues to be in great shape and we believe we could add over $130 million in debt and still feel very comfortable with our leverage and capital structure. That's all I have in the financials Matt.

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

[Operator Instructions] First question comes from the line of Jay McCanless from Sterne Agee. Please proceed.

Good morning guys. First, the question I wanted to ask was on the SPF market. What's going on there Matt? Is that a demand issue, a supply issue? And if the comps start to turn positive and firm up, will that help you guys?

Right now, I don't know that it has a huge impact either way as long as the pricing remains stable or slowly rising. That's a good situation for us. Right now, the absolute level of it is less important than the movement in it. So, we feel like we’re in good shape with it right now, but just there is a demand issue, I believe.

And then Mike, could you repeat your commentary on big-box sales? You cut out when you were saying that.

Big-box sales growth was 14% for the quarter.

Your next question comes from the line of Steve Chercover from D. A. Davidson, Please proceed.

I also want to talk about the lumber market a little bit, because western SPF has been really weak -- now this particular weak, so it's going down. And I was wondering, can Southern Yellow Pine and Western SPF diverge in the long-run?

That’s a great question. And if you look at the investment that mills have been making lately, you can see where the investment has been going. So, I think right now it is a demand supply imbalance, probably in both of those markets. As more production comes online in Southern Yellow Pine, I would expect that to have a mitigating effect on the price of Southern Yellow Pine. I don't think it's going to do a lot for SPF though.

And I’ve heard your comment that a slowly rising lumber environment is good for UFPI. And we know that if it's falling rapidly, then you could be subject to write-downs. But your margins are better when your input costs are lower, correct?

If you look at it on certain of our fixed-price added products, that's absolutely right. The fixed price added remains the same regardless of lumber market, so at a lower market, the margin would necessarily be higher.

Are those fixed-price added products, the majority of your business similar to how Southern Yellow Pine is a bigger component of your inputs?

I think it's a significant number, and it’s -- as you look at more of the retail type items, there is a fair amount of that in retail.

Okay, just a couple of more from me please. And so clearly, you are optimistic about the year ahead, which is great. But is the relatively weak start to housing of concern or is that incorporated into your thought process?

We actually predicted a lower level than a lot of the prognosticators did for housing starts this year. So, we would benefit if housing starts actually hit the numbers that others are talking about, and we should be okay with housing starts staying kind of where they are today. Obviously, any improvement in the economy helps us.

So what are you at, like $1.1 million?

We’re less than that. We're probably closer to $1 million.

So flat versus last year, okay got it. And then one more on housing, sorry if I'm taking too much time. In a multifamily dominate single family, can you guys still prosper for instance can concrete forming offset weak framing?

I think maybe there is a misconception, a multifamily product for us is probably a better framing opportunity than single family overall. So, the mix again is not as significant as you might think for us.

So you’re doing more like townhomes than skyscrapers?

We’re not doing skyscrapers, at least not today with wood.

I don't think you make skyscrapers out of wood although -- and people talk about it, but the forming would be appropriate. Okay last question I promise. Could you tell us what the -- you were talking about non-wood related packaging. So what's the substrate that you’re using there?

Well, it can be any type of alternative materials. It could be corrugated, it could be foams, it could be plastics, in any of those types of items, it could be steel, there is a whole variety of other materials.

I have to look into that, I mean I am familiar with them, but I don’t know how you would use them. So, we’ll take that offline. Thanks a lot.

The next question comes from the line of [John Evans from J West]. Please proceed.

Can you just give us any insight, has the momentum that you saw in March continued in April? And I know you were telling like 15 days. And just what have seen relatively in April with lumber pricing, et cetera?

We see a normal takeaway for April and typically our second quarter and third quarters are better quarters. So, it is in line with what we would expect right now.

There are no further questions waiting at this time [Operator Instructions]. With no questions waiting, I would now like to turn the call back over to Matt Missad for closing remarks.

Thank you. Unlike many in our industry, we have a very strong balance sheet, plenty of capital available for well planned growth in a diverse and sustainable business model. Our cash dividend policy returns earnings to our investors, and share repurchase plan is designed to prevent significant dilution of our existing shareholders. The start of the spring selling-season reminds me of the baseball season. It’s great to get-off to a good start like our beloved Detroit Tigers. But the team that went to the pennant is the one that is consistently good. I know our team loves to win, and will work hard to do that, and because we intend to mark this our 60th year with continued success and with a great outlook for the coming years and decades. I am betting on our team, and I thank you for supporting us as well. Have a great day.