UFP Industries, Inc. (UFPI) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Third Quarter 2017 Universal Forest Products Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference Ms. Lynn Afendoulis. Ma'am you may begin.

Good morning. Welcome to the Universal Forest Products Incorporated third quarter 2017 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 17, 2017. Before I turn the call over to Matt Missad, 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 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, everyone. We appreciate you taking the time to listen to our third quarter 2017 conference call. As we have discussed all year with our team, we have to learn it, earn it and then own it. So far in 2017 we have done a lot of learning. We are improving on earning. And heading into Q4, we need to own it by finishing 2017 strong and positioning ourselves well for 2018, and we are on track to do that. There were several highlights from the quarter which featured record quarterly sales and profits for our third quarter at Universal. However, the most valuable highlight of our third quarter was the exceptional selfless performance by all of our UFP family members who while being pummeled by hurricanes, earthquakes, flooding and fires, managed to keep our operations in business and take care of the needs of not only our customers but also their co-workers. The outpouring of support from the UFP family was outstanding. They are our heroes and I want to publicly thank them for the spirit and the culture that makes UFP a truly special place. I am honored to be on their team. They contributed to the overall results from the UFP family of companies which as we stated before were terrific. We posted sales of 1.1 billion, up 27.7% from 827 million in 2016. This included unit sales increases of 22%. Year-to-date sales were 2.83 billion, up 450 million from a year ago and each of our market showed double-digit sales increases. Moving to profitability, although our gross margins were down 60 basis points to 13.7% due primarily to the rapid rise in the lumber market and the higher level of the lumber market. Gross profit dollars increased 23% in line with unit sales growth. EBITDA grew 11.9 million or 22% versus 2016. EBITDA for the quarter was 66.7 million. Earnings per share were $1.64 or a 21% increase over 2016 and year-to-date earnings per share were $4.31. Moving to inventory, while inventory dollars are up 42.5 million versus 2016 due to the higher level of the lumber market, a few key items are still in short supply and we expect those to normalize by the end of the fourth quarter. With a little more on the lumber market, July and August saw more typical price levels which were in line with expectations. However, the weather events at the end of August and through September created a dynamic in which the market increased rapidly. For some of our retail products which are used for immediate disaster recovery, we try to hold the line on pricing and those geographic areas ravaged by the weather. This naturally compresses margins for a brief period and September was certainly affected but it's the right thing to do. We expected many items will remain in short supply until the mills can’t balance their supply with the demand needs. We will also adjust prices accordingly now that the immediate disaster relief period is over. We expect the lumber market to remain at higher than normal levels throughout the fourth quarter. Accounts receivables are 90.7% current which is below our target of 95% fortunately accounts receivable did decline as a percentage of sales to 122.5% versus 136.7% a year ago. And now let’s look at some areas of growth. We’ll start with new products, our new products sales for the quarter were 107.7 million versus 88.5 million a year ago. Year-to-date new products sales are 313.6 million and we are well positioned to exceed our 2017 target of 365 million in new product sales. ProWood Dura Color continues to show good sales gains and the new Deckorators decking products are capturing market share with their superior performance characteristics. The new Deckorators railing accessories are expected to be a much bigger contributor in 2018. And as I saw in our industrial products showcase last week, we are excited about many of our new industrial packaging solutions. Our design and engineering teams continue to create better packaged designs at a better value for our customers and our new testing facility helps increase our speed to market. On the international front, our international operations continue to grow and our ability to source and sell products worldwide is extremely valuable at times like these when there are product shortages in North America. We are able to substitute many products with our international footprint and our international contacts. We also continue to grow in Australia as our UBEECO operations added the assets of Silverwater Box to its Erskine Park location. The talent in Silverwater Box employees will be joining us there and we expect to continue our growth as the industrial packaging leader of Australia. On the acquisition front, we continue to look at new targets to grow our current markets and to add new product opportunities which are scalable for our operations. Our recent acquisitions in hardwoods and fixtures each have good long-term growth potential. In fact, idX showed very improvement in Q3 and we remain confident that we will achieve the long-term goals with their leadership team. As we look at challenges in areas of focus personnel remains a key priority. While our management team is strong, we continue to invest in training and technology to help prepare the next generation of leadership. Unique education programs like the UFP business school will help us tailor our education to the motivated students who don’t have the ability or desire to pay for an outrageously expensive college education. Hopefully, these students will be among UFP’s leaders in the future. And finding sufficient hourly production workers remains a struggle in many of our markets. We are using many creative programs to try to secure the necessary employees but this area will be a continued focus to improve going forward. And as you know, we continue to work on our SG&A costs. Year-over-year, SG&A increased by $18 million. Most of that increase was due to adverse issues but we know this is an area we need to continue to improve on. On a more positive note, SG&A was actually down $2 million for the quarter compared to Q2. And of course, some relief from burdens from regulations and cost reductions from a system based on healthcare instead of health insurance would be nice but we will persevere regardless. Now I would like to turn this call over to Mike Cole to provide other details on our financial performance.

Thanks, Matt. I will start with the highlights from our income statement. Our overall sales for the quarter increased 28%, resulting from a 22% increase in unit sales and a 6% increase in selling prices due to the lumber market. Our 22%-unit sales increase was comprised of 15% growth from recently completed acquisitions and 7% organic growth, which was up from 4% organic growth in Q2. Breaking down by market, sales to the retail market increased 16% resulting from a unit increase of 12% and an increase in selling prices of 4%. The Robbins acquisition completed earlier this year contributed 7% to year-over-year growth. We were pleased to see organic unit growth come in at 5% this quarter and improvement from last quarter when organic growth was flat. Our sales to the industrial market increased 59%, driven by a 54% increase in unit sales including 43% from recent acquisitions and an increase in selling prices of 5%. Again, organic unit growth of 11% this quarter surpassed Q2 when organic growth was approximately 8%. Our overall sales to the construction market increased 16% due to an 8% increase in units sold driven by our residential construction and manufactured housing businesses along with an 8% increase in selling prices. Organic unit growth was 7% this quarter was the same as Q2. Moving down to the income statement, our third quarter gross profit increased by almost 23% exceeding our 22% increase in unit sales primarily due to acquired operations and a favorable mix of value added products. Continuing to move down the income statement, SG&A expenses included approximately 12.4 million of accrued bonus expense which was flat compared with Q3 last year. The remaining 80 million in SG&A is 2 million lower than Q2 and in line with the expectations we discussed last quarter. Operating profit increased by almost 9 million or 20% during the third quarter to over 52 million. Likewise, EBITDA for the third quarter increased almost 12 million or 22% to nearly 67 million this quarter. Acquisitions contributed almost 5 million to operating profit and 7 million to EBITDA growth. Overall, we were very pleased to see our EBITDA grow in line with unit sales this quarter. On the income tax line, another effective tax rate was approximately 32% this quarter compared to 32.5% last year. This continues to be due to a new favorable permanent tax difference related to our ability to deduct the value of certain stock grants at fair value this year. Finally, our net earnings to controlling interest were 33.7 million, a 21% increase compared to net earnings of 27.8 million last year. Moving onto the cash flow statement, our cash flow from operating activities was 97 million this quarter -- so far for the year excuse me, and was comprised of net earnings of 91 million along with the non-cash expenses of 41 million offset by a $31 million increase in cash invested in networking capital since year-end due to the growth of our business and higher lumber prices. As I’ve mentioned on previous calls, we measure our cash cycle to assess our working capital management. Our cash cycle for the third quarter excluding acquisitions was in a solid shape at 44 days compared to 43 days last year. Including acquisitions our cash cycle increased to 49 days. Investing activities primarily consisted of 60 million spent to acquire quality hardwoods Robbins Manufacturing, Go Boy Pallet and a small joint venture in Mexico. And capital expenditures of 57 million so far for the year which includes expansionary CapEx of over 18 million. We’re currently planning for a total spend of approximately 70 million for the year. Financing activities included our semi-annual dividend paid in June totaling about 9 million and repurchases of 149,000 shares of our common stock for almost 13 million. As a reminder, our practice has been to buy back stock opportunistically in the price mix sense to offset stock based compensation issuances. Finally, with respect to our balance sheet, our net debt balance is about 153 million compared to 89 million last year primarily due to the 60 million borrowed and spent on acquisitions this year. Overall our balance sheet remains strong and we believe we could add up to 250 to 300 million in debt to continue to grow our business and still feel comfortable with our leverage and capital structure. Finally, our trailing 12 months return on invested capital is 10.4% exceeding our weighted average cost of capital was down somewhat from last year as we expect certain long-term investments in CapEx and acquisitions to reach our return targets overtime. That’s all I have on the financial spent.

Thank you, Mike. Now, I would like to open it up for any questions you may have.

[Operator Instructions]. And our first question comes from Ketan Mamtora with BMO Capital Markets. Your line is now open.

Good morning, Matt and Mike. And congratulations on a strong Q3. I mean organic volumes were pretty strong in all the three segments, particularly in industrials. Can you talk about which particular end markets within that or regions drove the strength?

Yes, I think we probably don’t look at it so narrowly Ketan, on more of a broad perspective, I think we’re seeing good positive strength in each of the markets we serve, probably with the slight exception of agricultural boxes, not quite as strong as it’s been historically. But all the other areas the end markets that we’re seeing good positive growth.

Okay. And then when I think about M&A, is it more likely that you guys are more interested in something which is more of a bolt-on type or more open to larger acquisitions. And again, I know you talked about it in your prepared remarks, but kind of any sense of which areas look most interesting to you guys at the moment?

Yes, I think what we’d like to do is try to find those tuck-in or bolt-on type acquisitions that fit our current product offerings or add to our geographies and our reach, current products, we also want to find new opportunities for either new products or services which complement what we are doing today. And we always remain open to larger acquisitions that are either in our current core or adjacent to our core. And the challenge that we see quite frankly right now is valuations that tend to be a bit of a problem. We are very return on investment focused as you know, so we need to make sure that whatever acquisitions we do, enable us to earn a return on that investment.

Got it. That’s helpful. And last question from my side. Again, you spoke about it briefly in your prepared remarks. But can you talk about the progress that you all are seeing at idX, whether it’s in terms of getting those orders that were delayed earlier or anything else that you all have done to kind of get to that target? And do you think that 25 million to 28 million is still on the table and could be probably possible in 2018 or may be 2019?

Yes, I think as I’ve said back in February, we saw at that time that 12 to 18 months was kind of the pushout cycle for hitting their targets of 25 million to 28 million. I think what they’ve been doing a really good job of as we’ve been going after some of the synergies that we anticipated weighting on. So, they’ve done a really nice job of going after those areas of cost savings, there’re also doing facility consolidations and trying to come up with more efficient ways. So, I think that’s what’s been the driver so far. This tends to be their busier time of the year as well. So that we expect that to be stronger. And again, while the retail markets going to have its share of challenges, we still see a lot of opportunity there and their diversity in their end markets has really helped them too. So, I would say over the next 12 to 18 months, and if you go back to last February, moving forward, well that’s the timeframe we’re still comfortable with.

Our next question comes from Steve Chercover with D.A. Davidson. Your line is now open.

So just a couple of quick ones from me. I’m wondering first-of-all if you could give us a sense of the impact of the hurricanes and earthquakes or other acts of God, like either on a revenue basis or maybe just in terms of lost operating days.

Yeah, I think that we are very fortunate and as I said before it's truly attributed to our people that we didn’t lose as many operating days as we might otherwise have lost. I think what we’ve seen is that there is some of our customers weren’t able to get back over as quickly. So, there was certainly some delay there. Orders on certain of the retail type products are actually much higher than normal going into the hurricane, things like panel products and other things that you might expect. So as people tried to prepare so we saw a sales increase, we also saw some margins squeeze as a result of this abnormal supply and our desire to keep pricing down in those areas that were affected. So, I can’t put a dollar figure on it Steve but I think what we kind of view overall is the short-term is a little short-term pain but there is a long-term pick up as the rebuilding occurs. So that’s our outlook on it.

Thank you. I guess what I was trying to get a sense was I mean you guys -- it imposed noise you guys played through it and could have even been perhaps even a wee bit better but we’ll see a tail in the benefit.

Yeah, I think you’re right. I think we would -- probably the volumes were a little bit higher and margins were lower.

Got it, okay. And then I’ve been doing this for a while so I checked back to 2002 and this is the first time in 15 years that your Q3 results have been equivalent to Q2, there has been a couple of times where they’re close. Is it fair to say that iDX is starting to demonstrate how it will offset some of the seasonality even if it's not full blown hitting its stride?

Yeah, I certainly think that’s part of it Steve and I don’t want to over emphasize the impact it's certainly part and I think as we talked before the lumber market struggles in Q2 I think probably held Q2 back from being as good as it should have been. So, I think Q3 was really good and Q2 wasn’t quite as good as it should have been. I think that’s the way I would look at it.

Got you. Can you tell us what the 18 million expansionary CapEx was for?

It’s for a variety of different objects, a lot of its new products related. Some of its catastrophe expansion for value added products that are on a growth change. Some of it is some plant consolidation, so it's really kind of across the board. Automation is also another area of emphasis for us.

Very good. And I guess a kind of follow-on to that and then I’ll stop. Looks like you’ve got some capital allocation decisions to make in the near-term which is a nice problem to have. So, you can just help us understand the priorities.

Yeah, I think obviously the first priority is growth, whether that’s at organic or acquisition, obviously we wanted to return something to the shareholders, our dividend policies, there is obviously a big part of that. Share repurchases when they made sense. And again, we think we have ample opportunities to improve our automation, so you may see little more CapEx dollars as well going forward.

And our next question comes from Dan Jacome with Sidoti. Your line is now open.

Two very high-level questions. What trends are you seeing on the manufacturing housing side? I think you did some paneling for them, I know the RV market has been pretty strong. Just curious on the manufactured housing. And then also very high level, if you care to speak on it, I mean do you think Amazon could ever get into the retail lumber yard business. It seems like they’re trying to do everything and it’s something I do get questions on. So just curious about those two items. Thanks.

Great. Let me take the MH item first. It’s a little easier for me. So, the manufactured housing, we’re definitely seeing some improvement there. The FEMA has actually increased their orders. So that would be more, be due to the weather-related issues. So, we expect that to get us a short-term boost for the next quarter or so. And then longer term I think what we will see is kind of continued slow growth in that market. So that’s a positive sign. RV, well we’re not as hugely dependent on RV business. That still seems to be strong. So, we see overall manufactured housing as being solid. And moving on to your second question, which is, is Amazon going to dominate the world. I don’t really like to try to take it, a back as to what they will or won’t do. I think we feel very good about our position in the marketplace and what we do. And since we are more of a manufacturer, distributor and hopefully and innovator, the retail channel will kind of take care of itself. So, we don’t view Amazon’s participation as a threat. And quite frankly, I think the service and the other aspects definitely push forward, you need to have brick and mortar at some point in the chain in order to make it effective. So, if they are going to do this, they’re going to have to invest in brick and mortar in order to make it work.

Okay. And then I guess I’ll ask one more, I’m not sure if you saw the acquisition by LPX, I think they’re buying a technology that is used in the EWT process. Just curious if you saw that or maybe have some thoughts on how you guys feel about all the inputs you have in your asset base for what’s being used to make EWT because its likely EWT will be bigger part of your business five years down the road?

Yeah, I’m not familiar with that I’m sorry Dan but you know.

Is on the flame retarding side, you know some of the materials that are used for that.

With the flame block product, that’s a product that we have marketed over the years, it's not been really anything new but I do think if you look overall at the fire-retardant market, that’s something that we would expect to see that increase a little bit as we go forward in a lot of areas more urban infield type projects are going to require that kind of products. So, we have a variety of fire retardant products that meet those needs. So, we’ll be active in the market as well and I think EWP generally there is lot of opportunities for it and I don’t know it's going to take more share than it has today but I just think it’s a good stable product line.

At this time, I’m showing no further questions. I would like to turn the call back over to Mr. Matt Missad for closing remarks.

Well once again we’d like to thank you for joining us on our call this morning. We truly appreciate your interest in our company and believe that we have an outstanding team committed to driving performance and increasing the value of our investment. And while some of you are thinking of Halloween and sweet treats, we are thinking more practical and slightly longer term. So instead of a little piece of candy, how about a Christmas gift of lower taxes for all. Thanks, and have a great day.

Ladies and gentlemen thank you for your participation in today’s conference. This does conclude the program. You may now disconnect. Everyone have a great day.