U.S. Markets open in 3 hrs 22 mins

Edited Transcript of UFPI earnings conference call or presentation 19-Apr-17 12:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Universal Forest Products Inc Earnings Call

GRAND RAPIDS Jun 8, 2017 (Thomson StreetEvents) -- Edited Transcript of Universal Forest Products Inc earnings conference call or presentation Wednesday, April 19, 2017 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Lynn Afendoulis

Universal Forest Products, Inc. - Director of Corporate Communications

* Matthew J. Missad

Universal Forest Products, Inc. - CEO and Director

* Michael R. Cole

Universal Forest Products, Inc. - CFO and Treasurer

================================================================================

Conference Call Participants

================================================================================

* Steven Pierre Chercover

D.A. Davidson & Co., Research Division - SVP and Senior Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the First Quarter 2017 Universal Forest Products, Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Lynn Afendoulis, Director of Corporate Communications. Ma'am, you may begin.

--------------------------------------------------------------------------------

Lynn Afendoulis, Universal Forest Products, Inc. - Director of Corporate Communications [2]

--------------------------------------------------------------------------------

Welcome to the Universal Forest Products, Inc. First 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 our webcast at www.ufpi.com. A replay will also be available at that website through May 19, 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.

--------------------------------------------------------------------------------

Matthew J. Missad, Universal Forest Products, Inc. - CEO and Director [3]

--------------------------------------------------------------------------------

Thank you, Lynn, and good morning, everyone. I appreciate you taking the time to join us on this morning's call.

The first quarter of 2017 was a bit like a spring training baseball game. We got the victory, and we're just getting warmed up for the season. We're very pleased to report record net sales and record first quarter profits in spite of a few challenges. We say it often, yet the experience and dedication of our employees helps us overcome these challenges to deliver solid results. I would like to thank them again for their tremendous effort in the first quarter.

As we go through our key business drivers, let's start with sales. Sales for the quarter were a record $856.8 million, up 23.5% from $693.9 million a year ago. By market, retail was up 14.9%, industrial was up 37.5% and construction was up 21.2% versus 2016.

Moving to profitability. Overall gross margin declined 80 basis points to 14.3% versus 15.1% a year ago. The biggest factors impacting gross margin were the impact of the higher lumber market, which is up 21% versus 2016 as well as the absence of a comparable buy-in opportunity like we experienced a year ago. We expect to be able to improve the margin once the lumber market settles out.

In addition to the margin challenge, we were able to absorb the normal start-up operating losses from our 7 new greenfield locations. We expect these operations to alter into profitability within the next 12 months. Weather-related closures in March also took a toll in the Northeast and the North Atlantic. Yet in spite of these obstacles, net earnings increased to $21 million versus $19.2 million a year ago, and earnings per share were $1.03 versus $0.95. EBITDA year-to-date was $46.9 million versus $42.7 million a year ago, while EBITDA margin was down in line with the gross margin decline. Again, we expect the EBITDA margin to improve with the gross margin improvement.

Inventories for Q1 stood at $472 million versus $327 million a year ago. This is due in part to the sales increases and, coupled with the higher level of the lumber market, comprises the remaining difference. It's important to discuss the impact of the North American softwood lumber dispute on the market. Over the past several weeks, the lumber market has jumped in anticipation of a U.S. binding that a duty should be imposed on Canadian imports. We don't know yet what the outcome will be, but we expect some preliminary announcement of findings next week. We continue to try to protect our customers by trying to limit the impact of a duty as well as protecting the access of U.S.-based re-manufacturers to affordable lumber suppliers.

Finally, accounts receivable were $365.6 million versus $287.4 million a year ago, which is in line with the expected impacts of higher sales and the higher lumber market.

As we look to the future, we recognize that facing challenges is nothing new, and we know if we can produce record performance in the face of those challenges, we have ample opportunities to improve in the balance of the year. We expect our acquisitions in greenfield operations to improve on their first quarter performance. We look for continued growth in new product sales, including our UFP-Edge products, charred wood and barn wood. Charred wood is a unique shiplap product, which the name accurately describes. It's beautiful, popular and is generating great excitement in the marketplace. This is the kind of trendsetting new product development that will keep us at the forefront of our markets.

In addition, new Deckorators offerings, including the Deckorators Heritage and bulk products continue to gain traction, contributing to total first quarter new product sales of $74.6 million. We are on track to hit our goal of $365 million in new product sales for 2017.

Our new LX Center for research, testing and product development is in full swing, and we count on this facility to not only help generate new products but to speed up the go-to-market process. It also serves to facilitate rapid iterative testing to help us provide customers with a product that meets their needs at a great value.

UFP Global LLC, our international affiliate, has organized these operations and expanded our sourcing and selling worldwide. The worldwide sourcing piece is very valuable with the current North American softwood lumber dispute. The selling piece has already expanded the international market for products we manufacture and creates additional sales opportunities for our new products, including our new hardwood initiatives. And our e-commerce reorganization to help our customers sell more of their products is already bearing fruit as our e-commerce sales are exceeding our projections. We expect this improvement to continue.

And of course, we continue to invest in our people, expanding training programs, growing our UFP Business School and providing great opportunities for our employees to grow their careers with us is critical to our continued success. Whether it's entry-level or sales and management, we are constantly looking for hard-working individuals who are motivated to be the best. And if that sounds like an invitation to apply for a job, it certainly is.

We continue to refine our benefits programs to match our employees' needs and are pleased with the support for our HSA medical plan. In spite of this plan, we still saw an increase of $1 million in medical expense for the first quarter versus 2016. Hopefully, we can get some common sense reforms approved by our legislators and regulators. I'm fairly certain no one will grant us sanctuary company designation to free us from these and other expensive regulations. But even without such relief, we will continue to execute our plan and reach our goals.

Now I'd like to turn it over to Mike Cole for more details on our financial information.

--------------------------------------------------------------------------------

Michael R. Cole, Universal Forest Products, Inc. - CFO and Treasurer [4]

--------------------------------------------------------------------------------

Thanks, Matt. Before reviewing the financials, I should briefly address the impact of the lumber market this quarter. Overall year-over-year lumber prices were up 21%, and Southern Yellow Pine prices, which represent our highest volume of purchases, were up 16%. As we've mentioned before, we attempt to pass changes in commodity lumber costs on in our selling prices so that we earn a targeted profit per unit. In periods of high lumber prices like this, gross profit and SG&A costs as a percentage of sales will look comparatively low. And we found that a better way to evaluate our profitability is to compare a change in unit shift with our changes in costs and profits. Also, our investment in working capital is comparatively higher due to the lumber market, so a better way to assess our working capital management is to evaluate those investments relative to sales and cost of goods sold.

Moving on to the financials. I'll start with the highlights from our income statement. Our overall sales for the quarter increased 23%, resulting from a 17% increase in unit sales and a 6% increase in selling prices due to the lumber market. Our 17% unit sales increase was comprised of 12% growth from recently completed acquisitions and 5% organic growth.

Breaking down by market. Sales to the retail market increased 15%, resulting from a unit increase of 9% and an increase in selling prices of 6%. Our unit growth this quarter was primarily driven by our acquisition of Robbins Manufacturing, which contributed 7% to our unit growth. Within this market, our sales to big box customers grew 19% with a small contribution from acquired operations, while our sales to other significant -- while our sales to other independent retailers grew 9%, with a significant lift from acquisitions.

Our sales to the industrial market increased 37%, driven by a 33% increase in unit sales. Our unit sales growth was comprised of 29% growth from recent acquisitions and a 4% organic growth rate. Organic growth resulted from a combination of improved demand from existing customers and continuing to gain a greater share of our existing customers' business. Our overall sales for the construction market increased 21% due to a 13% increase in units sold and an 8% increase in prices. Within this category, our unit sales increased by 16% to residential construction and 14% to manufactured housing customers, representing primarily organic growth.

Moving down the income statement. Our first quarter gross profit increased by 17.5%, which was slightly above our 17% increase in unit sales as the favorable impact of acquired operations was offset by inventory cost advantages we realized in the first quarter of 2016 that were not available in the first quarter of 2017 as well as temporary factors such as weather in certain regions and results of certain start-up operations.

SG&A expenses increased year-over-year for the quarter by $16 million or 23% as acquired businesses since March of last year contributed $13 million to this increase. Our accrued bonus expense for the quarter was about $8 million and was comparable with the prior year quarter. Our SG&A, excluding bonus expense, was almost $79 million, a $2.5 million or 3% sequential increase compared to Q4.

In the income tax line, you'll note that our effective tax rate was 33.2% this quarter compared to 34.7% last year. This was due to a favorable new permanent tax difference related to our ability to deduct the value of certain stock grants at fair market value this quarter.

Finally, our net earnings from controlling interests were $21.1 million compared to earnings of $19.2 million last year, a 10% increase but below our unit sales growth rate of 17%. Focusing on the big picture, this is due to unit growth associated with acquisitions without a commensurate profit contribution due to seasonality. Consequently, we don't anticipate this trend to continue in future quarters.

Moving on to our cash flow statement for the year. Our cash flow used for operating activities was $71 million this quarter and was comprised of net earnings of almost $22 million, noncash expenses of approximately $13 million and an increase in working capital since year-end of $106 million, driven in part by higher lumber prices. As I mentioned earlier, our working capital is up in part due to the lumber market and acquisitions. So a good indicator of our working capital management is our cash cycle. Our cash cycle for the quarter, excluding acquisitions, was 53 days compared to 54 days last year. Including acquisitions, our cash cycle increased to 59 days.

Investing activities primarily consisted of $55 million to acquire quality hardwoods, Robbins Manufacturing and a small joint venture in Mexico.

And capital expenditures are almost $17 million so far for this year, which includes expansionary CapEx of over $5 million.

Finally, with respect to our balance sheet, our net debt balance is about $246 million, which includes seasonal working capital of over $100 million. Our balance sheet remains strong, and we believe we could add $250 million to $300 million in debt to continue to grow our business and still feel comfortable with our leverage and capital structure.

That's all I have in financials, Matt.

--------------------------------------------------------------------------------

Matthew J. Missad, Universal Forest Products, Inc. - CEO and Director [5]

--------------------------------------------------------------------------------

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from the line of Steve Chercover of D. A. Davidson.

--------------------------------------------------------------------------------

Steven Pierre Chercover, D.A. Davidson & Co., Research Division - SVP and Senior Research Analyst [2]

--------------------------------------------------------------------------------

So first of all, could you elaborate a bit on the 7 greenfield operations that you started? What exactly are they doing? And where are they located?

--------------------------------------------------------------------------------

Matthew J. Missad, Universal Forest Products, Inc. - CEO and Director [3]

--------------------------------------------------------------------------------

They're located all over the country. They're just the -- they are expansionary opportunities and they're in each of the different markets, not material in any -- by any stretch, but it's one of those things that, we either grow via greenfield or we grow via acquisition. We choose to do both. And so we don't pay any goodwill for the greenfield operations, but we expect to encounter normal start-up losses. So they're in line with our expectations. They're just a drag on earnings.

--------------------------------------------------------------------------------

Steven Pierre Chercover, D.A. Davidson & Co., Research Division - SVP and Senior Research Analyst [4]

--------------------------------------------------------------------------------

And are they producing the gamut of products that can be dedicated to residential, industrial, et cetera?

--------------------------------------------------------------------------------

Matthew J. Missad, Universal Forest Products, Inc. - CEO and Director [5]

--------------------------------------------------------------------------------

Yes, yes, they serve -- not all of them serve every market, but they serve either multiple markets or 1 or 2 markets.

--------------------------------------------------------------------------------

Steven Pierre Chercover, D.A. Davidson & Co., Research Division - SVP and Senior Research Analyst [6]

--------------------------------------------------------------------------------

Okay. And then I wanted to talk a wee bit about idX. I think that's contributing to the elevated SG&A right now. And maybe you can tell us just how much and what the proper run rate SG&A should be?

--------------------------------------------------------------------------------

Matthew J. Missad, Universal Forest Products, Inc. - CEO and Director [7]

--------------------------------------------------------------------------------

Yes. I think overall -- I'll let Mike talk about future kind of run rate of SG&A, but you're correct in your assessment, the SG&A increase is due in part to acquisitions, and they're the largest of the SG&A pieces of the acquired companies. So that does have an impact. It's important to keep in mind that idX in the overall scheme of things is still less than 10% of our company. It's kind of the size of one of our regions. So we don't get too excited about the impact one way or another. But Mike, maybe you want to touch on the future run rate for SG&A?

--------------------------------------------------------------------------------

Michael R. Cole, Universal Forest Products, Inc. - CFO and Treasurer [8]

--------------------------------------------------------------------------------

Yes. So I guess you had asked what the amount of the increase of SG&A was associated with acquisitions, the total is $13 million. And you're right, the lion's share of that is idX. With regard to run rate, I think last quarter, we called out our core SG&A of being right around $77 million and said that, going forward into this year that, plus a small inflationary-type increase, would be in line with expectations for the year. And that's pretty much where we landed in Q1. So the core SG&A number was about $79 million, a $2.5 million increase or about 3% in Q4. So that looks like a pretty reasonable number going forward within a small range.

--------------------------------------------------------------------------------

Steven Pierre Chercover, D.A. Davidson & Co., Research Division - SVP and Senior Research Analyst [9]

--------------------------------------------------------------------------------

Got it. And then finally, you said you that remain committed to having the supply to provide your customers with top service, et cetera. And the supply of affordable lumber is being jeopardized presumably by the U.S. imposing tariffs or duties or quotas of some sort. We're already pricing it in advance of the event. But are you in favor of limiting Canadian access to the U.S. market? Or would you rather -- if the Canadians are silly enough to sell lumber below fair market value, wouldn't you just be happy to take it?

--------------------------------------------------------------------------------

Matthew J. Missad, Universal Forest Products, Inc. - CEO and Director [10]

--------------------------------------------------------------------------------

Yes. I think for us, we take a position that the overall level of the lumber market is really not a big issue to us as long as it's not rapidly rising or falling. And as we look at the situation with Canada, we're not necessarily in favor of a duty. We just want to make sure that affordable housing and all those things continue. So we want to make sure that the overall level of the lumber market remains reasonable. And as you pointed out, yes, if someone's willing to sell material cheaper, we're more than happy to purchase it.

--------------------------------------------------------------------------------

Steven Pierre Chercover, D.A. Davidson & Co., Research Division - SVP and Senior Research Analyst [11]

--------------------------------------------------------------------------------

Yes. Okay, I lied. One more question. Labor is getting fairly tight in certain jurisdictions, certainly in Oregon. Are you finding that your ability to produce components in a factory environment is beneficial? And is that something you're trying to really leverage, selling factory manufactured components to residential builders?

--------------------------------------------------------------------------------

Matthew J. Missad, Universal Forest Products, Inc. - CEO and Director [12]

--------------------------------------------------------------------------------

Yes, absolutely, Steve. I think that that's one of the key selling points of being able to produce it in the factory. There's less labor on-site, less waste on-site and it helps speed up the construction process. So we certainly try to promote that viewpoint and definitely believe that, that helps us.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

Thank you, and I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Matt Missad for closing remarks.

--------------------------------------------------------------------------------

Matthew J. Missad, Universal Forest Products, Inc. - CEO and Director [14]

--------------------------------------------------------------------------------

Once again, I'd like to thank you for taking the time to join us on today's call. I'm confident that each of the UFP employees is motivated to grow ROI, which is return on investment, both because they like to win and they are rewarded for their achievement of this goal. That also helps them and you as shareholders. We will keep running hard to make sure we finish well, just like our very own Matt McSween, who qualified with the elite runners and finished the Boston Marathon this week in the top 400 men in spite of a bum Achilles tendon. We couldn't ask for a better example of the can-do spirit at UFP. Thank you again for your support and interest in the company and have a great day.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.