UFP Industries, Inc. (UFPI) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Universal Forest Products Incorporated First Quarter 2016 Earnings Release Conference Call and Webcast. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I’d now like to turn the conference over to Lynn Afendoulis, Director of Communications. You may begin.

Thank you and welcome to the Universal Forest Products Incorporated first quarter 2016 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 May 15, 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, everyone. I appreciate you taking the time to be on the call today. Some of you may think I’m running out of superlatives when I phrased the terrific effort of Universal employees. Others may think, I’m beginning to sound like a broken record on these calls. Both groups are correct, and I love sounding like a broken record when our people did such a great job of breaking records. The first quarter of 2016 is another example of their determination and execution, and along with a little help from Mother Nature driving UFP to the best first quarter in its history. As you now know, the first quarter was exceptional. We were able to increase capacity utilization in our facilities, increase our operating leverage, sell new products, and continue to provide better solutions for our customers and for the end consumers. Here is a quick recap of our four areas of focus. In sales, first quarter 2016 sales were $682.2 million, an increase of 7.8% over 2015. Now the composite lumber market in Q1 was 12% below the lumber market in Q1 2015, so that impacted the sales dollars. The Southern Yellow Pine market was down 10% year-over-year. Our unit volume increased in all markets by an aggregate of almost 13%. Now sales by market were as follows, retail 17% increase, the same-store sales for our customers were up substantially over 2015 in the retail market. Construction was up 9%, building was able to continue throughout most of the quarter in most of our markets was certainly held. In industrial sales, dollars were down 3%. While sales dollars declined, units were up 5%. Now we continue to seek more value-added solutions, more design and engineering opportunities, and we may miss out on some commodity type sales. Our commitments to new products continues to grow as new products sales for Q1 were $67.5 million, up significantly $51 million in 2015. The next area of focus is EBITDA. Our operating leverage obviously was much better in Q1 than a year ago, and our EBITDA reflection. EBITDA for Q1 is $42.7 million, compared with $28.5 million last year, and more importantly 6.3% of net sales versus 4.5% a year ago. Our earnings per share for the quarter was $0.95 and that is 86% better than last year. We are very pleased with each of our companies that they focus on driving profitability and they continue to look at ways to reduce expenses and improve efficiencies, as we continue to guard against cost creep. Our inventory level was $327 million, well below last year’s level and in line with our expectations. Again, more importantly, as a percent of current month sales, it was 128.8% versus a 171.4% in 2015. The lumber market for Southern Yellow Pine has been climbing for the last several weeks that have fairly steady pace entering the peak selling season. It is still 2.5% below 2015 levels. The composite lumber index has been relatively flat last three weeks. The mills are reporting steady order files, so as of now, we look these trends to continue. Finally, accounts receivable. Our goal on accounts receivable, we are in 95% current. We currently were 93.52% at quarter end and a write-off percentage for the quarter is less than 0.04% [ph] which is still a good statistic. We continue to monitor credit closely and try to balance acceptable credit risks with profitable sales growth. Those are just the highlights and still part of the story. The other parts of the story as a strategies, we are pursuing to grow the company and improve our profitability. We have said, we are going to grow both through organic expansion, as well as targeted acquisitions. We are expanding capacities and consolidating facilities in California. We are adding capacity at Washington State, Idaho, and Tennessee among others. We have been patient in the acquisition market and are finally seeing multiples come back to more normalized levels. We did complete an opportunistic purchase of a specialty manufacturer, operation in Northern Virginia, which will complement our construction market operations. And we remain very active in negotiating with several other potential targets. Our new product sales growth remains a priority and we plan over 70 new product introductions in 2016. By the end of the third quarter, we expect our new development and testing facility to be operational. This will help to achieve our goal of faster development of new products as well as provide unique services to our customers. Our international growth continues organically as we find new customers and vendors in several new countries. We continue to look at acquisition opportunities that can accelerate this growth and help us bring our products to new markets and new products they produced to our markets. And in development and training, we continue to believe, we have the best people in the industry. We also want to recruit and train more future stars. In addition to our existing training and development programs, we are launching the UFP Business School in the fall of 2016. This unique program will provide a scholarship for hardworking high school or college graduates, who want a better, faster and less expensive education with a great job opportunity as part of the UFP family of companies upon completion of that education. We will have more information about the UFP Business School at a later day. Now, I’d like to turn it over to Mike Cole to talk about some of the key financial results.

Thanks, Matt. Before reviewing the financials, I should briefly address the impact of the lumber market this quarter. Overall and year-over-year, lumber prices were down 12%, while prices are selling in a time, which represents our highest volume of purchases were down 10%. As a reminder, commodity lumber prices impact not only our cost of inventory, but also our selling prices in working capital levels. I’ll start financial overview with highlights from our income statement. Our overall sales for the quarter increased 8%, resulting from a 13% increase in unit sales, offset by a 5% decrease in selling prices due to the lower lumbar market. Reviewing by market, sales to the retail market increased 17%, driven by a 19% increase in units, offset by a 2% decrease in selling prices. Unit sales increased primarily due to better demand, helped by a milder winter than last year. Along with market share gains, due in part to our new product sales initiative. Within the retail category, sales to our big box and independent retail customers grew by 20% and 13%, respectively. Our sales to the industrial market decreased 3%, driven by an 8% decrease in selling prices, offset by a 5% increase in unit sales. A 5% organic growth rate in unit was comfortable with the results from Q4, the lower than previous quarters, which we think is due to a general softening of demand and our operations being more selective in the business that we take focusing on higher margin opportunities. Our growth this quarter was achieved through market share gains, primarily to continuing to add new regional locations of existing customers, as well as adding new product sales. Our overall sales for the construction market increased 9%, due to a 15% increase in unit sales, offset by a 6% decline in selling prices due to the lumber market. Within this category, our unit sales to residential construction increased 22%, commercial construction grew by 17%, and manufactured housing increased by 6%. Moving down to income statement, we’re very pleased to report, our first quarter gross profit increased by 29% and 250 basis points as a percentage of sales. The increase in our profitability and margins this quarter was driven handful effect that was including favorable improvements in our sales mix, the higher margin products, strong organic unit sales growth and leveraging fixed costs and effective buying in lower lumber costs on products we sell with fixed selling prices. SG&A expenses increased year-over-year for the quarter by $9.1 million, or 15%. Excluding bonus expense, our core SG&A increased by about $5 million to $62 million, a 9% increase compared to last year. Our accrued bonus expense increased as a result of our profit growth and improvement in our return on invested capital. Overall, we’re very pleased to report an increase in operating profit of $14 million, while our bottom line earnings increased by over $9 million, or 89%. Moving onto our cash flow statements for the year, our cash flow from operating activities improved by almost $21 million this quarter, and was comprised of $20 million of net earnings and $11 million of non-cash expenses, offset by a $61 million seasonal increase in working capital. We’re very pleased with our working capital management this quarter, particularly our inventories, which were less than a 130% of March sales versus over 170% last year. Under investing activities, our capital expenditures were $13 million this quarter, including expansion in CapEx of over $3 million. As a reminder, we’re still planning to spend about $70 million in total CapEx for the year with expansion in CapEx that’s included $5 million. With respect to our balance sheet, continues to be strong with net debt of only $42 million compared to $186 million a year ago, leaving us with plenty of unused debt capacity available to fund future growth, dividends, and possibly share buybacks. That’s all I have on the financials, Matt.

Thanks very much, Mike. Now, I’d like to open the line up for any questions that you may have.

Thank you. [Operator Instructions] Our first question comes from the line of Steve Chercover of D.A. Davidson. Your line is now open.

Good morning. I hope your targets were hit the balls, how do you guys are?

Good morning, Steve.

Good morning.

We can only help.

Actually I’ve been doing okay. So my first question is, you said and I’m quoting here paraphrasing that you’re well positioned to meet growing demand in the spring building season, and Mike also mentioned effective buying. Did you guys really aggressively buy a lumber in the kind of late January, early February timeframe?

I think, the way I would look at it Steve is that, we planned accordingly. We tried to buy ahead based on what we thought utilization would be. But I wouldn’t say that we bought way ahead in anything that was practically different from prior years. I think we took advantage in certain situation, but it was primarily based on what our orders looked like. So we were able to protect our margin there.

Got it, thanks. And after going straight up for nine weeks, I guess, maybe this is more SPF. It’s rolling over pretty good now, but also heard you say that order files are pretty strong. So do you have a view or we probably just didn’t kind of for stable pricing over the core building season, is that your assessment?

Yes, that’s what we’re being told today. As you know, it’s very, very difficult to predict. But we’re kind of looking at the relatively stable situation kind of it’s been in the last few weeks.

And therefore you think you can maintain these margins, if I’m not mistaken there might be a little bit above what you think is sustainable?

Yes, again, it’s always difficult to predict the margin situation. But I would say, we’re very confident that we continue our current performance levels.

Great. Well, thank you very much. Good luck.

Thank you.

Thank you. And our next question comes from the line of Michael Conti of Sidoti & Company. Your line is now open.

Hey, good morning.

Good morning, Michael.

Good morning, Michael.

Yes. So can you – you cut out a bit on the M&A. Can you just talk a bit more about that pipeline? And within each of your segments, where you’re looking at most maybe any bolt-ons or perhaps any greenfield operation?

Sure. I think, we are looking at opportunities in each of our markets, and the nature of the opportunity is obviously different by market. So from an industrial standpoint, we’re obviously looking at a lot of different opportunities there, both from an acquisition perspective, as well as our greenfield organic growth opportunities, which we expect most of them will have industrial capabilities. As you look at retailers, obviously, consolidation opportunities within the market there and also new product opportunities that we’re looking at. With respect to construction, we’ve made it publicly known that we’re staying within kind of our core geographies, but we’re going to grow within those geographies, add new products and services as needed. So I would say, we have opportunities that we’re working on across all of the spectrums, and we’re very optimistic that we’ll be able to put some things together for sure.

Okay. And then on your residential on the site building, I know, you’re more geographically focused there. But where you’re seeing pockets of strength in that particular part of your business?

With respect to the site-build construction, I think, we’re generally seeing relative strength in each of the markets that we serve. I don’t think there’s any exceptions today.

Okay. And just a follow on the previous kind of questions on the gross margins. But if prices were to stay flat here throughout the rest of the year, how should we think about gross margins, given that, I guess, in the back-half of last year you had that benefit of consuming lower price lumber?

Yes, I think, what you’re going to have to look at is probably take a bigger look at historical trends with our margins in this type of market situation with relatively stable lumber pricing. That’s how I would look at it, I was trying to analyze it. And as I said before, we’re very comfortable with our current run rate, and obviously can’t predict what the lumber market is going to do. But we’re very confident in ability of our team to maximize their operating leverage and be able to utilize facilities to kind of keep that current pace going.

Great. I’ll hop back in queue.

Thank you.

Thank you. And our next question comes from the line of Jay McCanless of Sterne Agee. Your line is now open.

Good morning, gentlemen, how are you?

Good morning, Jay.

Sorry, Mike, can you break out on that 250 basis point gain in the gross margin? Can you break out what was lumber in there? And then maybe some of the other drivers please?

Yes, I called out three primary drivers. So now I’ll work through the smallest percent. The operating leverage in the volume and leverage in the fixed cost, we’re still trying to put together the – what we think the final numbers out there. But I put that like 25 just a basis point. So I think that the balance of that margin improvement at the 250 basis point, although I think that’s kind of a split between the lumber market being very low and having that after fixed selling price products. And then we can definitely see that the favorable mix changes in the higher margin products in Q2. So I think those kind of split the balance of that, so 100 basis points each.

Okay, so 100 basis points for lumber number base…

Yes.

Okay, perfect. Thank you. My second question and I apologize if I didn’t hear this correctly. But did you guys say that in the industrial business you’re seeing demand softening? Is that across the Board for what you do in industrial or is that in certain businesses?

Yes, I’m not sure that overall demand is necessarily softening. I know there’s certainly some heavy equipment manufacturers that are seeing some difference due to the currency issues. So I mean that said I think part of our outlook is that unit sales are still up, obviously not as much as we like of the deal, but that’s okay. We’re going to continue to improve in that area. I think the other part of it is that there maybe some commodity type sales that we’re missing out on – as our team tends to try to find better margin opportunities to do more value-added products so.

We’re trading a little bit lower growth rate than what we’ve seen in past year’s that were much bigger margin improvements in industrial areas, because of managing our capabilities and what we do there, that’s our biggest margins out there.

And industrial that…

Yes.

I think new opportunity is there, your biggest – okay. The next question I had is, was the increase in the core SG&A of roughly $5 million this quarter versus last year. Should we go ahead and build there a higher base rate of core SG&A, given the hiring that you guys have talked about and staffing up? Is that – what should we be building and I guess the best question for SG&A?

Yes, good question. So I think sequentially like Q4 in previous quarter, we’re running at $58 million, $59 million in SG&A. I called out $62 million this quarter, so $3 million to $4 million for – yes $3 million, $4 million increase, almost $2 million of that bad debt expense, and so that’s something that happens from time-to-time and that’s a few customers that we had concerns about. So I don’t know that I would build in anything for that. The balance of the increase was more compensation, headcount, benefit cost related. So I think 60 to 62 is probably a reasonable core SG&A amount.

Okay.

Again being a bit higher because of the bad debt expense this quarter.

Got it, okay, I think that’s all I had. I appreciate you guys. Thank you.

Thank you, Jay.

Thank you. And I’m showing no further questions at this time. I’d like to hand the call back over to Matt Missad. You may begin.

Thank you again to all of you for participating on the call today. We are – we hope that you are pleased with your return on investment in UFP. And we know that we have to work hard everyday to improve that returns for the long-term. Now as you work with this spring for your outdoor projects, enjoying a light winds, and the fresh outdoor air. We hope that you’re including a new deck, a new railing, some post caps, and maybe some of our other outdoor essentials products. Perhaps you’ll place some of the Belknap Hill Trading Post outdoor games that we made and enjoy a little campfire. Whatever we do – whatever you do, we hope that you’ll keep in mind the words of the late Maurice White that when you plant your flower, you grow a pearl. Thanks and have a great day.

Ladies and gentlemen, thank you for participating in today’s conference. That does conclude today’s program. You may all disconnect. Have a great day everyone.