Universal Forest Products' (UFPI) CEO Matt Missad on Q2 2016 Results - Earnings Call Transcript

| About: Universal Forest (UFPI)

Universal Forest Products, Inc. (NASDAQ:UFPI)

Q2 2016 Earnings Conference Call

July 21, 2016 8:30 AM ET

Executives

Lynn Afendoulis – Director-Corporate Communications

Matt Missad – Chief Executive Officer

Mike Cole – Chief Financial Officer

Analysts

Ketan Mamtora – BMO

Michael Conti – Sidoti

Steve Chercover – Davidson

Operator

Good day, ladies and gentlemen, and welcome to the Universal Forest Products’ Second 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 follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Lynn Afendoulis, Corporate Communications. You may begin.

Lynn Afendoulis

Thank you and welcome to the Universal Forest Products Incorporated second 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 August 20, 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’ll turn the call over to Matt Missad.

Matt Missad

Thank you, Lynn, and good morning, ladies and gentlemen. Thank you very much for joining us on our call.

At the risk of plagiarising myself, I don’t think you can have too many superlatives to describe the performance of the employees of the family of Universal. We set another record in the second quarter for earnings, which is also an all-time record for earnings in a quarter during our entire 61-year history. And we do believe in the adage that records are meant to be broken.

Now, we don’t take these terrific results for granted and we’re not taking selfies and saying, look at me. We’re keeping our head down to focus on finding new ways to add value and to keep our momentum going. We remain confident in our people, in our plans and believe that with good execution we can continue to grow both sales and profits at our target rates.

Now I’d like to highlight our focus areas. Sales for the quarter were up 4%, retail was up 7.5% due to strong repair-and-remodel demand. Industrial was down 2.9% due to lower volumes from our existing customers, which they attribute in part to the stronger dollar which hurts their export business. Construction was up 6.5% as housing starts increased.

While we know we could immediately add more commodity sales to grow the top line number, we are more focused on adding value. To achieve sales growth and add value, we continue to pursue both our acquisition growth and our organic growth plans. Our recently announced acquisitions will drive sales and increase our market penetration. We also expect to have several new facility expansions, as well as a new greenfield operation in Oklahoma completed in Q4. We continue to build a pipeline of other acquisition targets in order to meet our strategic goals in 2017 and beyond.

Gross profit remains strong and increased over our Q2 2015 by 170 basis points. Net earnings for the quarter, as I mentioned, were an all-time record $33.4 million and the EPS was $1.64 a share, well above 2015’s EPS of $1.29. Our year-to-date EBITDA is $108 million.

Accounts receivable were $318.5 million and that is in line with our sales growth. Our present current remains near to 93% mark. Inventories were at $298 million, which is about 10% below 2015’s level. So overall our inventories are in very good shape relative to our current sales level. The lumber market itself on the SYP, Southern Yellow Pine, market rose during April and May and declined in June, finishing the quarter near where it started. The SPF market, on the other hand, rolled slowly throughout the quarter.

The next thing we are going to talk about is new products. We are very excited about our new products and our new product growth. New product sales through Q2 are $160 million versus $135 million in 2015. The Dura Color treated products and the Deckorators products, including the Vault decking continued to grow. The feedback from consumers on the Vault decking products has been very positive and we look to continue to grow our sales there.

Our investment in product development efforts is expanding and we remain on track to open our design, testing and research facility in Q3. We need to be faster to the market and to increase our throughput on new products. This facility will help accelerate prototyping and application testing and help us streamline the new product vetting process.

International manufacturing growth via acquisition remains a challenge. We are having difficult time finding acceptable companies and an investment value which permits our ROI model to wood. However, we keep trying and we keep pursuing new targets. In the mean time we plan to dedicate more resources to our international sales and purchasing efforts to build on our existing business.

Now I’d like to turn it over to Mike Cole for more detail on the financial performance.

Mike Cole

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 up 8%, and Southern Yellow Pine prices, which represent our highest volume of purchases were up 4%. As a reminder, commodity lumber prices impact not only our cost of inventory, but also our selling prices and working capital.

I’ll start the financial overview with highlights from our income statement. Our overall sales for the quarter increased 4%, resulting from a 3% increase in unit sales and a 1% increase in selling prices. Reviewing by market, sales to the retail market increased 8%, driven by a unit of 5% and an increase in selling prices of 3%.

Our unit sales growth rate this quarter was lower than Q1, which we believe was due to a shift in demand due to favorable weather earlier this year. Our sales to the industrial market increased – decreased 3%, driven by a decline in unit sales. We believe this decline 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. On a positive note we believe we continue to take share and added almost $6 million in sales to new accounts and $4 million of new product sales this quarter.

Our overall sales to the construction market increased 6%, due to a 5% increase in unit sales. Within this category our unit sales to residential construction increased 10%, commercial construction improved by 3%, and manufactured housing increased by 4%.

Moving down the income statement we are very pleased to report our second quarter gross profit increased by 17% and a 170 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, the higher margin products, particularly on sales to our retail and industrial markets, organic unit sales growth to our retail and construction markets and leveraging fixed costs and effective position buying for inventory.

SG&A expenses increased year-over-year for the quarter by $9.6 million, or 14%. Accrued bonus expense comprised about $14 million of our SG&A this quarter and was up about $3 million due to our improved profitability and return on invested capital. Excluding bonus expense, our core SG&A was about $64 million and increased $6 million or 11%, compared to last year. The increase in our core SG&A was primarily due to higher compensation costs, and increase in sales and other incentive compensation, and certain employee benefit costs.

Overall, we are very pleased to report an increase in our operating profit of $9.5 million, while our bottom line earnings increased by almost $7.5 million.

Moving onto our cash flow statement for the year, our cash flow from operating activities improved to $40 million this year, and was comprised of $54.5 million of net earnings and almost $21 million of non-cash expenses, offset by an increase in working capital since the beginning of the year of almost $36 million. We are very pleased with our working capital management this quarter, particularly our inventories, which were less than a 109% of June sales, versus over 125% last year.

Investing activities included capital expenditures of $24 million this quarter with expansionary CapEx of over $8 million. As a reminder, we plan to spend about $70 million in total CapEx for the year.

With respect to our balance sheet, continues to be strong with almost $88 million in surplus cash and almost $86 million in debt, leaving us with plenty of unused debt capacity available to fund future growth and dividends.

Finally, our trailing 12 months return on invested capital has increased almost 14%, substantially driven by an increase in our EBITDA margin to 6.9% from 5.5% last year.

That’s all I have in financials Matt.

Matt Missad

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

Question-and-Answer Session

Operator

Thank you. [Operator instructions] And the first question is from Ketan Mamtora. Your line is open, of BMO. Your line is open.

Ketan Mamtora

Thank you. Good morning, Matt and Mike. So just first question on the construction market, I know obviously you guys had a pretty good growth of 10% that’s better than the housing starts. Can you just provide some color of what you are seeing in the market and where the growth is coming?

Matt Missad

Well, I think from the construction side, we have, there’s a number of different areas that we serve within that market. So we have the commercial construction, we have the manufactured housing and we have the traditional site-built housing within that market. So the multi-family growth remains strong. We’re receiving a lot there, we’re adding new products within that space. So that’s part of it.

And as you know, we don’t have a total national footprint on the site-built sides, it’s primarily a geographic play and so that maybe driving some of the changes in the national number versus the regional ones.

Ketan Mamtora

Got it, that’s helpful. And then switching to M&A just generally can you talk about kind of end markets or geographies that interests you?

Matt Missad

Yes, I think as we’ve talked about before, where we want to again increase our geographic footprint in the areas where we aren’t. We also want to increase our market penetration in our existing markets and we continue to look for new opportunities to add adjacent markets and adjacent product lines to our mix. So that’s not just in the U.S., but also internationally.

Ketan Mamtora

And internationally what markets would be – are you all interested in?

Matt Missad

We are keeping our eye – the BRIC countries or things that we’ve talked about before, but they have their share of issues at the moment. So what we’re trying to do is find opportunities where we have good partners, where our multinational customers are located or they want us to be and also where there’s opportunities with existing partners to grow our business. So we haven’t limited the scope at this point, but we’re looking at all reasonable opportunities.

Ketan Mamtora

Okay. And then just one last question, obviously your stock has done very well now, crossed $100, have you all considered, a stock lift?

Matt Missad

That’s certainly something that is a good idea to look at and think about. And that’s something, I’m sure that our Board will be talking about.

Ketan Mamtora

Okay, thanks very much. I’ll turn it over. Good luck for the rest of the year.

Matt Missad

Alright, thank you very much.

Operator

Thank you. The next question is from Michael Conti of Sidoti. Your line is open.

Matt Missad

Good morning Michael.

Michael Conti

Good morning. Yes, thanks for taking my questions, just a couple here. Just looking within the industrial side, looks like the soft demand continued from the first quarter, can you just give us an idea if that declining unit, does that meet your own internal projections? And then how much of that decline was specifically tied to just being selective?

Mike Cole

Yes, I don’t think we have the color on that Michael to give you a fair answer. I couldn’t really identify it that way. I think as we look at it our big concern is we want to continue to grow our market share. And based on the number of new customers that we added during the quarter, we’re confident that we continue to add new share. It’s just that sales with existing customers are less than they projected. So we feel confident with that, whatever within the range of the market growth, or in this case market decline.

Michael Conti

Okay. And then, I guess, do you have the year-to-date number of how many new customers you’ve added within the industrial side?

Mike Cole

No, I don’t have that on the top of my head, Michael. But it’s something we can get.

Michael Conti

Sure, okay. And can you just break down the drivers for the gross margin expansion and the increase to gross margin each driver was responsible for?

Mike Cole

Yes, that’s real tough Mike. I call out the higher margin, value-added products as being a factor, retail and construction growth organic growth and leveraging operating costs and position buying. And I can see all those things coming through in our data. But to be able to give a precise number on each one of those factors is really difficult with this many products and customers we serve. So I would say that they all were substantial contributors to the quarter.

Michael Conti

Sure, got it, okay. And then just regarding the two acquisitions, can you just give us an idea on their product mix, is it more commodity-based, more value-add? And is there any need for incremental capital spending required just that they are now integrated to your platform?

Mike Cole

Yes they are two very different businesses, one, serves primarily the retail market and it will enable us to expand our penetration into that market and a lot of independent retailers and other things that they service. And so we’re looking forward to that and adding some of our new products into that mix, it would be very helpful for them and for us. The other acquisition tends to be more in the manufactured housing space and we’ll use that as a consolidation opportunity to combine our industrial facility. And we think that the synergy there will be very, very dynamic in that market.

So two very different markets that we serve, but in both cases they’re going to drive our sales and will enable us to – and our belief hit their EBITDA margin targets.

Michael Conti

Sure okay. And last one from me just the core SG&A of $64 million is a bit higher than the first quarter. Is that the new run rate we should use for modeling purposes?

Mike Cole

Yes, I think in Q1 I had said I thought core SG&A is $60 million to $62 million depending on the quarter was probably pretty reasonable. When I look at the core SG&Aat $64 million, there’s some things in there that I think that are the employee benefit cost wise that will probably repeat. So I think $62 million is probably a better target against going forward.

Michael Conti

Got it, perfect. Thank you.

Mike Cole

Thank you,

Operator

Thank you. And the next question is from Steve Chercover of Davidson. Your line is open.

Steve Chercover

Good morning, running at superlatives here.

Matt Missad

Good morning, Steve.

Steve Chercover

Thank you. So just a couple of quick questions. First of all, I just wanted to get a sense of how things are trending in Q3, I mean normally we see some modest seasonality that provides for a slight downtick in earnings. But perhaps that’s not happening in Q3 of this year or alternatively may be these acquisitions will, I mean, lead towards a similar type of quarter.

Matt Missad

I’m assuming that was a statement Steve in that earlier question.

Steve Chercover

Well I guess we’re just looking for some help, I mean…

Matt Missad

Sure I understand.

Steve Chercover

Are your trends similar thus far in Q3 to what you experienced in Q2, which was just off the chart is terrific.

Matt Missad

Again I’m trying not to give guidance. So what I can do is I can tell you that the lumber market is trending still kind of in a stable mode, the economy overall seems to be in somewhat of a stable mode now. So given those factors I would expect this to be a typical type year.

Steve Chercover

Alright, and then we have seen a modest shift towards more single-family as opposed to multi-family construction. And I think you’ve done very well with the multi-family I’m just wondering whether that’s going to be beneficial or a bit of hill winds going forward?

Matt Missad

Yes, I think we have a pretty balanced business between multi-family and single-family. So I think as long as both of them continue to remain stable or are growing, that’s good for that part of our business.

Steve Chercover

Okay.

Matt Missad

I expect it just in between multi and single-family is not a negative from our perspective.

Steve Chercover

And then finally any developments on the industrial side and you said it was a little bit weak, you attributed that to the currency. Is that going to persist you think, or are some of those industrial products kind of non-discretionary, so if people defer the purchase for a quarter or two, they still have to get them ultimately?

Mike Cole

Yes, I think Steve that if we split up our customer base there’s some that fall into the camp where the strong dollar is just going to have an ongoing impact as it has here recently for other customers as you said that those are non-discretionary and the stuff that we’ll just kind of continue along. From our standpoint what we’re trying to do is again focus more on our design engineering capabilities, come up with a better product and packaging solutions for our customers and try to make sure that we are providing more value add to them. And that’s been our focus and that’s we’re trying to get closer to the customer in that regard.

Steve Chercover

Great. Thanks for taking my questions.

Mike Cole

Thank you very much Steve.

Operator

Thank you. There are no further questions in queue. I’ll turn the call back over to Matt Missad for closing remarks.

Matt Missad

Well, I’d like to say thank you again. I’m very proud of our family of companies and the great employees, many of whom are shareholders, who are making us successful. Like Olympic athletes, our people train each day to strengthen our company and stay ahead of the competition. Unlike the real Summer Olympics, which happen every four years, we compete every day. And we measure wins by whether we provide good returns to our stakeholders. I hope that we continue to win just like we hope for lots of medals for our athletes and a safe Olympic games in Rio.

Thank you again for your support and have a great day.

Operator

Thank you. Ladies and gentlemen this concludes today’s conference. You may now disconnect. Good day.

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