UFP Industries, Inc. (UFPI) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Quarter Four 2015 Universal Forest Products, Inc. Earnings Conference Call. My name is Caroline and I’m 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 the conference. [Operator Instructions] As a reminder, the call is recorded for replay purposes. And now I’d like to turn the call over to Lynn Afendoulis, Director of Corporate Communications. Please go ahead.

Thank you. Welcome to the Universal Forest Products Incorporated fourth 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 March 19, 2016. Before I turn the call over to Matt, 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 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’d like to turn the call over to Matt Missad.

Thank you, Lynn, and good morning, ladies and gentlemen. If there ever was a time and we could just drop the phone and let the results speak for themselves this would be it. But that’s not our style. Our 2015 results were outstanding. But we know that competition is fierce and we also know that our previous accomplishments do not guarantee future success. Fortunately our people are so motivated to excel and to break their own records that we see no reason for a let down in our effort or our performance. I’d like to start by giving all the members of our universal family of companies the recognition they deserve for what I consider a spectacular 2015. In the fourth quarter, they set new records for performance, and that helps to make UFP 60th year in business, it’s most profitable ever. Before we walk away from 2015, let’s quickly review some key highlights for the fourth quarter and the year. Net sales in Q4 were $653.6 million and for the year were nearly $2.9 billion, representing year over increase -- year-over-year increases of 5.4% and 8.5% respectively. Our sales by market were as follows. Retail, up 13.6% for the quarter to $230.7 million and up 10.8% for the year to $1.1 billion. Construction was down 1.6% for the quarter to $221.2 million and up 1.4% for the year to $898.3 million. Industrial was up 4.7% for the quarter to $209.3 million and up 13.5% for the year to $896.6 million. Our net earnings for Q4 were $18.9 million or $0.93 per diluted share, up 103% over the fourth quarter of 2014 and for the year net earnings were $80.6 million, a 40% increase over 2014. EBITDA for the quarter totaled $42.2 million and for the year was $179.5 million. Gross margins were up significantly over 2014 due in part to a lower lumber market as well as good strategic buying decisions. We also benefited from better than expected weather in most of the country throughout the quarter and our customers continued their strong performance which helped to keep our facilities busy and boosted our operating leverage. As we look at our inventories at year-end, we feel very good about the level and position of our inventory. Since year-end, the market has been relatively stable, although the market is down 10% from January 2015 levels. With announced curtailments in production management programs in place by some mills, we anticipate a more balanced market in the near-term as supply is brought in line with actual demand. OSB was slightly higher than a year-ago, it’s still hanging near historical lows. For accounts receivable we’re 87.9% current, which unfortunately is more typical for year-end, but still well below our target. We continue to look for ways to improve the percent current, while also maximizing sales and profitability. As great as 2015 was our whole team recognizes that seven weeks after year-end, 2015 is no longer current or meaningful and our focus is solely on 2016 and beyond. We are still comfortable with our long-term growth targets of sales growth of 4 to 6 percentage points greater than positive GDP growth and EBITDA percentage in the 5% to 6% range. One of our biggest challenges is to continue to add new products and services to our mix of sales. We’ve increased our investments in new products and our results continue to improve. Our new product sales for 2015 were $260.1 million, which exceeded our 2017 goal of $250 million. Going forward, our long-term goal is to have new product sales comprise at least 10% of our total sales. We were not at that level in 2015 and we expect total sales to keep growing, so we’ve some work to do to get that level. A few notable products are the ProWood Dura Color treated lumber products. The LCi-SS insulated panel products for new construction and remodeling applications, our high-end decorators -- decking product where we will be adding capacity in 2016, and our increased growth in flat engineered panels for a wide variety of applications in each of our markets. In addition to normal projected organic growth, we continue to look at acquisition opportunities. As we’ve mentioned for quite sometime valuations have been challenged, although we now believe the valuation multiples for most companies in our markets have peaked. We expect to complete acquisitions which compliment our existing products and services, as well as pursuing new opportunities that get us into additional new products, new expertise to enhance our existing offerings or additional geographies. We still maintain a philosophy to pursue targets which will provide us with a reasonable return on our investment. In the absence of these types of sensible acquisitions, we will increase our capital expenditures to facilitate more organic growth. We’ve improved our cash flow generation to meet these capital needs and we will approve those capital projects which meet our return on investment targets. On the personnel front, we continue to strengthen our team and are always looking for more talented hardworking individuals. The regulatory environment coupled with the so-called Affordable Care Act is driving costs up and has the effect of keeping potential entry level employees from joining the workforce and getting the training they need. So in addition to our existing training programs, we will be piloting new programs to help train recent high school or community college graduates to be better prepared for the business world. We hope this program will help those that have the smarts and the motivation, but maybe not the money to pay for training or college. Overall, we believe in our diversified business model, and while we understand that certain market conditions that occurred in 2015 may not replicate themselves in 2016, as long as we’ve a stable economy we feel very good about our prospects. Now I’d like to turn it over to Mike Cole for some more detailed financial information.

Thanks, Matt. Before reviewing the financials, I should briefly address the impact of the lumber market. Overall, lumber prices for the quarter were down almost 16%, while prices of [indiscernible] time, which represents our highest volume of purchases, were down almost 14% for the quarter. As a reminder, commodity lumber prices impact not only our cost of inventory, but also our selling prices for products we sell in a variable pricing formula at the current market price of lumber. I will start the financial with the highlights from our income statement. Our overall sales for the quarter increased 5%, resulting from a 11% increase in unit sales offset by a 6% decrease in selling prices due to the lumber market. Reviewing by market, sales for the retail market increased 14% driven by a 17% increase in units, offset by a 3% decrease in selling prices. Unit sales increased due to a combination of market share gains, improved consumer demand, and our new product sales initiatives. I think it’s worth noting that our sales to Big Box customers grew 22% this quarter and our new product sales grew by over 44%. Our sales to the industrial market increased 5%, because of the 13% increase in unit sales. Acquisitions contributed about 7% to this unit growth, leaving 6% as the organic growth rate. This is the most lower than we’ve achieved in past quarters, which we think was due to a general softening of demand. Our overall sales to the construction market decreased 2% due to a 6% decrease in prices offset by a 4% increase in unit sales. Our greatest sales growth continues to be with customers that buy concrete forms as we continue to gain share. In addition, our unit sales to the manufactured housing market increased by 5%, while our unit sales to residential construction customers remain flat. Moving down the income statement, we’re very pleased to report that our fourth quarter gross profit increased by 34% and 320 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, effective buying in lower lumber costs on products we sell with fixed selling prices, which we estimate drove by the 150 to 200 basis points of our gross margin improvement. SG&A expenses increased by $9.2 million or 16%. Excluding bonus expense, our core SG&A remain at about $58 million compared to $54.5 million last year, a 6.4% increase but considerably less than the 11% increase in unit sales as we leveraged our fixed cost. Our bonus expense increase is a result of our profit growth and improvement in our return on invested capital. Overall, we’re very pleased to report that our growth and gross margin improvements allowed us to more than double our bottom line earnings this quarter. Moving on to our cash flow statement for the year, our cash flow from operating activities improved by $96 million to $169 million this year, and was comprised of $127 million of net earnings and non-cash expenses and a $42 million decrease in working capital primarily due to lower lumber prices and as a result of bringing inventories in line with expectations. Investing activities included capital expenditures of almost $44 million, including expansion area CapEx of over $16 million. And under financing activities, I should point out that in addition to dividends, we paid off the small balance we had on our revolving credit facility, leaving out $285 million available. With respect to our balance sheet, continues to be in great shape with available cash net of debt of almost $3 million compared to almost $99 million of net debt a year-ago. This leaves us with plenty of capital available to fund future growth, dividends, and share buybacks. Looking forward to 2016, we plan to increase our capital expenditures to a total of $70 million to $75 million, including expansion rate CapEx of about $40 million. As we’ve mentioned on previous calls, multiples for business acquisitions are still a bit high. If that continues, we will reinvest into growing our business organically where we’re more comfortable on our ability to earn a reasonable return. Finally, with respect to our financial goals and annual results, we’re very pleased to report that our people achieved unit growth -- unit sales growth of almost 12% for the year, exceeding our goal of 79%. They beat our EBITDA margin goal of 6% and they increased our return on invested capital to over 11% exceeding our weighted average cost to capital. That's all I have on the financials, Matt.

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

Thank you. [Operator Instructions] Comes from the line of Jay McCanless from Sterne Agee. Please go ahead. Jay you may have your line on mute. You’re live in the call.

Yes. Got to turn that mute button off. Good morning, guys.

Good morning, Jay. How are you?

Doing well. Thank you. Matt, could we go back to or Mike, sorry, to the gross margin bridge. I think you said a 150 to 200 bps of the gross margin gain over last year came from lower lumber prices. What -- could you fill in the rest of that up to the -- I think you -- how much of the gross margin was up like 270 bps year-over-year. Could you fill in the rest of that from the lower lumber prices?

Yes. The gross margin increase was 320 basis points for the year. There were three main factors that I called out. The first was the lower lumber prices and products we sell with fixed selling prices. We think that was about 150 to 200 basis points. It’s kind of looking at the sequential improvement in margin on those products from quarter-to-quarter. But the other things were, we continue to have favorable improvements in our sales mix and industrial and in other areas, two new products has certainly given us a margin lift. And then we had great organic sales growth this quarter, and that certainly helped us leverage fixed cost. That was probably $4 million or so to the gross profit.

Okay. And then, when we think about lumber prices to start 2016, I think SYP is still down year-over-year and I think OSB, it’s actually up a little bit year-over-year. Should we expect the same type of gross margin impact from the lower lumber prices like you saw this quarter? And if lumber were to turn later in the year, I guess, what I’m asking is number one, should we expect the same impact on the gross margin from lumber prices being low right now? And then as you guys transitioned to more commodity goods in the second and third quarter, how should we expect the gross margin to trend if lumber prices stay where they’re now?

Yes. I think, Jay, it’s really difficult to predict because more of it has to do with product mix than anything else. So selling seasons and as Mike has pointed out whether they’re fixed or variable priced items is going to have a bigger determination than the level of the lumber market at this point. I think, as I said, I think our people did a great job with some good strategic buying decisions which we hope are repeatable, but they’re not always. So I think as we kind of look at the market, its going to depend on how quickly the market moves, if it moves, and when it moves. And the product mix is more important than being able to say that the gross margin is going to stay relatively the same as long as lumber prices are lower, because I don’t think that’s necessarily the case.

Okay. And then just wanted to ask again for modeling for the full-year, when I think about the retail segment of the business, could you talk about what percentage of those goods now for the full-year or maybe even on a quarterly basis or going to be fixed price goods versus commodity goods, because it seems like what the big gain that you guys had in the retail sales segment this year versus last year, I’d think that that was a big driver for the gross margin gain that you saw from 4Q [indiscernible] of this year?

Yes, I think as you look at it Jay, that the retail market tends to be a much more variable priced market. So I probably wouldn’t put your emphasis there. I think the sales growth in the product mix; particularly new products are skewed heavily towards retail, so that’s very helpful. But I wouldn’t necessarily assume that that’s the lumber market gains we’re going to come in that space.

Yes, treated lumber goes to the retail market Jay, and that’s our biggest category of variable priced product.

Okay. And then, so the sales mix change that you guys talked about that drove the gross margin gain was most of that in industrial or was that in construction?

Yes, I think what it is to kind of put it on a broad terms Jay, its really much more value added, so more heavily designed and engineered products, more assembly, more finished goods production as opposed to the selling sticks and panels, I think we’ve moved along that continuum that we’ve talked about for a few years now and we continue to get more into that where we can provide greater value to the customer, that’s our goal and as we do that, that tends to enhance our margin level.

Got it. And then, in terms of the acquisitions that you’re looking at, is there a theme to those acquisitions, is it focused on packaging, other parts of the business where you’re seeing the most opportunities right now?

Well, each of the markets has opportunities. We look at clearly as we looked at some of the industrial areas. We still have some holes, we can fill in there. We have potential for what we call bolt-on or add-on type acquisitions in each of our other markets. So we’re going to try to be cautious about it and try to find those that provide us with the best return in the shortest period of time. And then again as I mentioned, we’re going to continue to look for some new products to add to our mix and new services and other things that we can do to expand throughout our entire network of operations.

Okay, all right. I will get back in queue. Thanks guys.

All right. Thank you.

Thank you for that question. The next question comes from the line of Steve Chercover from D.A. Davidson. Please go ahead.

Thanks. Hi, Matt. Hi, Mike.

Good morning, Steve.

Good morning, Steve.

Okay, just a couple. About five years ago, I guess, I will put Mike in the hot seat here, about five years ago, you said you might resume giving guidance when the market was less volatile, so are we there yet?

Sorry, Steve.

I think that’s the bail Mike out there Steve. That was the prior administration and therefore the newer administration is not a fan of guidance.

Fair enough. Okay. I had a feeling that we weren’t going back there. And then, I know you guys don’t like to talk about the weather, and it was a terrific quarter, but would you say that weather was actually quite benign in Q4 and perhaps thus far into Q1 of this year?

It certainly has been better than it’s been in the recent past, Steve, and I think we’re fortunate for that. It really has more to do with our customers being able to take deliveries and continue to do their projects and still having strong sales themselves which enabled us to help keep that production going.

Got it. And then -- and finally Matt, you talked about recruiting associates and assisting them -- pardon me, with post secondary education. So is that for folks on the facility floors or is that kind of sales and management roles?

It’s going to be both. Obviously, we’re drawn to our own employees and if they want to move up in the organization, but they haven’t had the ability to go to post secondary education, we’re going to start very, very small, but the concept is to try to bring people in that can move up in the organization, if we want to do better and given the platform to do that.

Well, that’s always been the way. I mean, even the gardener can become the CEO, so we know that there is [multiple speakers] ability there.

That’s true.

Okay. But I mean with perhaps the decline of the oil patch in the Dakotas and elsewhere, are you finding it any easier to get labor that its, I guess, we’re calling blue collar at the moment?

You know its -- I wouldn’t say its any easier, but North Dakota we don’t have any facilities there, but it probably would have been a good opportunity to get people in that market and parts of Texas, the oil patch as you call it, has had some impact there, but other parts of their economy are growing. So, I don’t think there is a plethora of people out there who are looking to start out in entry level blue collar type situation. So we’re still fighting that battle and we will continue to do it.

Great. Well, good luck on establishing a new high watermark in ’16.

Well, thank you, Steve.

Thank you. The next caller is Mark Wilde from Bank of Montreal.

Good morning, Matt.

Good morning, Mark. How are you?

Good morning, Mark.

Good. Congratulations on a good quarter. A few questions. Matt, you mentioned something about a 10% decline in January. I wasn’t clear on whether that was a volume issue that you were seeing or whether that involve price or what that was, can you clarify?

Sure. Yes, it was -- it’s more of the lumber market, Mark. If you look at January 2015 to January 2016, the market is down about 10%. So we’re still plugging along, but I just thought that was an important fact to note.

Okay, all right. Second question, Mike, jump up and expansionary CapEx, it looks like about $30 million year-over-year. Can you talk a little bit about what that’s going into?

Well, it’s going into a lot of different areas. Its capacity relative to new products, expanding capacity within industrial that can be an expansion at existing plants given the opportunity to be more and increase their capabilities, but also new plants. We have new plants online and Oklahoma and another new plant in Colorado. So, its -- it really touches many of the different areas in our business.

Okay. And the last question I had, is currency having any effect on the business? I mean, I can see that for a lot of types of wood products we’re seeing a lot more imports and we’re seeing fewer exports. Does any of that have any impact on Universal?

Yes, I think, Mark, what we’re seeing is its clearly helping keep pricing down from a lumber market perspective. I think while the Canadian species have a significant value enhancement due to the currency difference. There is also a number of imported products that have a better price advantage given the strength of the dollar. And we’re also seeing the mills probably struggle a little bit more selling offshore because of that currency issue. So I think that might be one of the drivers as to why the market is lower this year than it was a year-ago.

Okay. That’s helpful. Good luck in the first quarter and through ’16.

Thank you very much.

Thank you for that question. There is no further questions in the queue. So, now I’d like to turn the call back over to Matt Missad for closing remarks.

Once again I’d like to thank you for your time and investment in UFP. While we can’t control the economy or the political landscape, we can’t continue to do our best to manage and grow our business and continue to create new opportunities for our Company and for our people. Since we’ve an early Easter this year, let’s hope for an early spring. Have a great day.

Thank you, Matt. Thank you for your participation today -- in today’s conference. That concludes your presentation. You may disconnect. Have a good day.