UFP Industries, Inc. (UFPI) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Quarter Three 2015 Universal Forest Products, Inc. Earnings Conference Call. My name is Feli and I will your operator for today. At this time all participants are in listen-only mode. We'll conduct a question-and-answer session towards the end of this conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Lynn Afendoulis, Director of Corporate Communications. Please proceed.

Thank you and welcome to the Universal Forest Products Incorporated third 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 website through November 15, 2015. Before I turn the call over to Matt, 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 the 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 this morning. It is truly a privilege for me to represent the great people of UFPI on this call, especially when they deliver phenomenal results like these. We are thrilled with the record breaking performance and have our sights on even loftier goals. A quick review of our key focus areas is as follows. Third quarter sales were $773.2 million, which was a 6.9% increase over 2014. Year-to-date sales were up $195.8 million over 2014. By market for quarter three, sales growth was retail up 9.2%, construction up 0.7%, and industrial up 10.9%. Overall unit sales were up almost 12%, while the overall lumber market declined 18% year-over-year for the quarter, and prices for Southern Yellow Pine decreased 22.4% year-over-year for the quarter. We don't think this downward trend in prices will continue much lower, and in fact some production has been taken out from market recently in order to balance supply with demand. As for profit, our third quarter net earnings increased 32.8% over 2014 to $25.6 million. EBITDA for the first nine months of 2015 is $137 million compared to $108 million last year, and overall our EBITDA margins for the latest 12 months were 5.8% versus 5.2% for the same period a year ago. Now we did receive some margin percentage lift as a result of the lower lumber market and good purchasing decisions. Our inventories have come down nicely and are now at $288 million. As a percent of current month sales, it is 122.6% versus 122% in 2014, and we do expect it to be more in line with sales for the balance of 2015 except for position buys and special items. Our accounts receivable currently stands at 91.9% current, and our write-off percentage for the quarter is less than 0.1% of sales. We’re very pleased with our performance thus far with receivables. Now I’d like to briefly review some of our strategic priorities for the balance of 2015 and beyond. Our new product sales initiative continues to meet our expectations. Year-to-date new product sales through September are $181.2 million, and we are on track to hit our goal of $190 million in new product sales this year. We’re also well positioned to hit our target of $250 million annually by the end of 2017. We’re very excited about the introduction of our Deckorators Vault non-wood composite decking at the recent Deck Expo Show. It was very well received and has far superior features and benefits to the competition. And we're also seeing some traction over the Belknap Hill outdoor entertainment products online. Sales are modest thus far but growing nicely. In personnel, another one of our focus areas, we continue to expand our training and recruiting efforts to supplement our growth. In addition to our normal hiring of sales and management trainees, we’ve added additional design and engineering professionals to help us pursue more solution driven business in our growth markets. Capital deployment is always a concern, and as we evaluate opportunities for utilizing capital, we continue to focus on growth, improving efficiencies, and providing a good return to our shareholders. We’ve been diligently pursuing acquisition opportunities throughout our target markets. And as we have discussed many times, valuations remain a challenge making it difficult to earn a fair return on the expected investment necessary to acquire a target. So in select markets where we cannot agree on valuations with potential targets, we will be increasing our capital on investment to grow organically. Our returns to shareholders are achieved through our cash dividend and our modest share repurchase programs, and as you know our stock buybacks are designed to repurchase shares commensurate with new issuances under our stock based compensation programs. In transportation, again this is a constant area of focus, and we continue to make improvements. We are looking to add to our logistics team to position us for better performance in 2016 as well. Overall, as a company, we remain excited about our prospects going forward, and I have great confidence and faith in our team. We continually seek out new avenues for growth which complement and enhance our existing businesses, and we also seek out new and talented and motivated employees who will continue to drive the growth and improve performance. Now I’d like to turn it over to Mike Cole, our Chief Financial Officer to review in more detail our financial performance and condition. Mike?

Thanks Matt. I'll start with highlights from the income statement. Our overall sales for the quarter increased 7% due to a 12% increase in unit sales offset by a 5% decrease in selling prices due to the lumber market. Our unit sales were up due to a combination of acquisition and organic growth. Businesses we acquired since Q3 of last year contributed 3% to our overall unit growth, while our organic growth was up 9%. By market, sales to the retail market increased 9% due to a 13% increase in unit sales. Unit sales increased due to a combination of market share gains, improved consumer demand, and our new product sales initiatives. It’s worth noting that our sales to Big Box customers grew by 17% this quarter and our new product sales grew by over 19%. Our sales to the industrial market increased to 11% driven by a 17% increase in unit sales. Recently completed business acquisitions contributed 11% to our growth in unit sales. Remaining 6% organic growth resulted from share gains with existing customers as well as adding many new customers. Our overall sales to the construction market increased 1% due to a 6% increase in units offset by a 5% decrease in selling prices. Our greatest unit sales growth continues to be with customers that buy our concrete forms as we continue to gain share. In addition, our unit sales to manufactured housing fell by 2%, while our unit sales to residential construction customers increased by 10%. Moving down the income statement, we’re very pleased to report our third quarter gross profit increased by 24% and almost 190 basis points as a percentage of sales. The increase in our profitability and margins this quarter was driven by a handful of factors including favorable improvements on our sales mix to higher margin products, strong organic unit sales growth and leveraging fixed costs, and effective buying in lower lumber costs on products we sell at fixed selling prices. SG&A expenses increased year-over-year for the quarter by $8 million or 13%. By expense category, our overall increase in SG&A included a $3 million increase in wages and benefits related primarily to greater headcount and another $3.3 million increase in incentive compensation tied to profitability. I was pleased to see that our core SG&A expense without our bonus incentive remained flat sequentially at about $58 million comparing Q3, Q1, and Q2. Overall, we’re very pleased to report that our growth and gross margin improvements drove a 32% increase in our operating profits and 33% increase in earnings this quarter. Moving on to our cash flow statement, our cash flow used in – provided by operating activities improved by $51 million to $121 million so far this year and was comprised of net earnings of almost $65 million along with $32 million of non-cash expenses as well as a $25 million decrease in working capital due to lower lumber prices and as result of bringing inventories in line with expectations. Investing activities included capital expenditures of almost $37 million, including expansion area and efficiency CapEx of over $14 million. We currently plan to spend approximately $50 million on CapEx for the year. With respect to the balance sheet, at the end of September, we had no outstanding balance on our revolving credit facility and our total debt net of available cash dropped to $23 million compared to $59 million a year ago. This leaves us with plenty of capital to fund future growth, dividends and share buyback plans. Finally, we’re very pleased to report that our trailing 12 months return on invested capital has increased to over 10% for first time since the recession, which is a goal we think is striving hard to achieve. That's all I have on the financials, Matt.

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

[Operator Instructions] Your first question comes from the line of Steve Chercover from D.A. Davidson. Go ahead.

Thanks. Good morning, Matt. Hi Mike.

Good morning, Steve.

Good morning, Steve.

So just three quick ones from me. First of all, can you give us a sense if there is any geographic trends that we should be aware of. I guess I’m wondering if there is still any pent-up demand in the South of - particularly Texas given there was pushback by the Q2 rains?

That's a good question, Steve. I think Texas in particular has recovered nicely from the rains, I think the labor issue is probably the bottleneck there. So there is enough labor to perform the extra work, and it will get done but I think that’s really what we’re seeing as the bottleneck.

But Mike, some of the strong activity persists into Q4, I mean I think it is still pretty hot and warm down there?

Yes. It certainly could. I think Texas is still recovering from the rains they had, so it may persist longer you just don’t know.

Okay. And I agree with you that lumber is probably near bottom, especially given the actions taken on both sides of the border to reduce production, but if there is minimal upside, can you maintain margins in this kind of 14% range if lumber was to stay flattish into 2016?

That’s a great question and I think as we've looked at obviously there is some benefits in terms of margin percentage. It kind of depends on what the lumber market does as well as all the other product mix is probably an equally important factor for us. And I think if we dive into the third quarter itself and looking at how the lower lumber market helped us and fixed price products we have, I think that’s probably about 100 basis points out of about 190 basis point that we improved for the quarter. So that portion now can be tougher to duplicate.

Yes, I am not saying it would grow, but if lumber kind of flattened around here and you guys continue to improve your operations, then presumably that’s always a stretch call, but not impossible.

Yes, it's certainly a goal Steve, and I probably couldn’t commit to you that everything if it's in a flat market that everything stays the same. Again product mix is probably a bigger driver for us.

Got it. And then my last question is sales to construction is lower, let me rephrase it. I think it's encouraging that your growth is coming from retail and industrial and I think you're outpacing both of those markets, and yet sales to construction is lower than the market, and I know that falling prices introduce noise there. But is that an opportunity if housing continues to accelerate by about 100,000 units a year.

Yes and I think for us Steve, you have to look at the markets that we serve and we are in what we want to be long term stable markets, and if you evaluate the markets where we are with our site built activities, which is what you're referring to, I think that’s how you would analyze and look at how we're -- our growth will happen. We're not necessarily looking to get into the big markets. We're comfortable in the markets that we serve today and we'll grow within those areas.

Okay. And sorry I'll throw in one last one, and if housing remains kind of skewed more towards multifamily than single family than it has been over normal cycles. That’s an opportunity for you as opposed to the headwind.

Correct. Yes, we anticipate that that will be the case going forward given financial constraints on buyers, and we think there’ll be more renters than may there has been historically.

But your facilities are well equipped to provide…?

Very well positioned for that business.

Great. Thank you very much.

Thank you.

Thank you. Your next question comes from the line of Jay McCanless. Go ahead Jay.

Good morning, guys. First question I had is on the lumber, can you tell me again what you said the lumber impact was this quarter on sales?

Overall, it was a 5% decline in selling prices because of lower lumber prices.

Down 5% on lumber, okay. And then on the SG&A, can you give me the spit again between what you said was incentive comp and the new headcount.

Yes, the -- of the increases. The increases were -- $3 million of the increase in SG&A was wages and benefits and headcount related, and $3.3 million of the increase was incentive comp.

With the base staying around 57-58 correct.

That’s exactly right

Okay. Can you guys quantify at all -- you gave the guidance of about a 100 – I mean not guidance, but you said about a 100 basis points of the gross margin improvement was due to fixed price products. How -- what percentage of your sales on average are in fixed priced products now and are those the increases that we're seeing at the Big Box and in the new product side? Is that a big reason why you guys are seeing this gross margin lift?

Well Jay, I'll let Mike dig into the details. I'll try to give you my macro picture view here. You've to look at the timing of variable price products versus fixed price products and again that’s why I keep going back to the product mix. A lot of variable price products are sold during second and third quarters, probably the heaviest concentration. So again I think we have a good mix and that's the mix that we are trying to shoot for as we go forward as well, but Mike I don't know if you can add any more color.

Unless this fixed price product comes on the residential construction, commercial, and industrial side, the retail business like Matt said especially in Q2 and Q3 is little more weighted towards the variable price. Certainly, it does have the value added products we sell into retail have fixed prices, but it is a little more weighted towards variable. So the benefit that I talked about on the lower lumber prices really occurred more at the industrial and residential construction areas. Q – Jay McCanless : Okay. And then could you guys may be in terms of unit volume, did you guys ever take a look and see how much of the unit volume growth that you saw this quarter was may be stuff that got pushed from 2Q end of 3Q?

We really don't have any visibility into that Jay. Anecdotally you can kind of look around and see that in some markets we mentioned Texas already that it was a little bit softer in Q2 and a little bit better in Q3. But those are really more anecdotal. We don’t have a real way of saying how much was deferred and how much is natural for that time period. Q – Jay McCanless : Understood. Okay, great. Thanks guys.

Thank you.

Thank you. I would now like to turn the call over to Matt Missad for closing remarks.

Well thank you once again for your interest and investment in our company. And I know we in the State of Michigan are gearing up for the big game on Saturday, but unfortunately the Flying Dutchman are not paralyzed. So I’ll simply say go blue and go white for fans of the other game on Saturday. Have a great day.