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Universal Forest Products Inc (NASDAQ:UFPI)
Q3 2019 Earnings Call
Oct 24, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2019 Universal Forest Products Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. After a brief moment of silence, I will turn the call over to Brandon Froysland, Director of Finance.

Brandon Froysland -- Director of Finance

Welcome to the Universal Forest Products, Incorporated third quarter 2019 conference call. Hosting the call today are CEO Matt Missad, and CFO, Mike Cole. Matt and Mike will offer prepared remarks and then the call will be opened up 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 November 24, 2019. 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 the company's expectations and projections. These risks and uncertainties include but are not limited to those factors identified in the press release and in the filings with the Securities and Exchange Commission.

At this time, I'd like to turn the call over to Matt Missad.

Matthew J. Missad -- Chief Executive Officer

Thank you, Brandon and good morning everyone. Welcome to our third quarter 2019 investor call. Fall is in full swing for sports enthusiast with football, the World Series hockey and basketball. The spirit of competition, the desire to be the best you can be and the motivation that each competitor has to make his or her team better feels the excitement of sport. It is that same spirit that drives each member of the UFP family of companies around the globe.

Our goal this year was to be exponentially greater than before, and I am excited and honored to say that through the first three quarters of 2019, our team has excelled. Once again they have delivered exceptional results setting records in profit and earnings per share while growing sales units by 7%. I want to thank them for their outstanding performance. We are so driven to improve, we not only will be pushing to finish 2019 strong. We are also positioning the company to achieve even more in the future. I'll talk about the future in a minute, but first, let's do a recap of the third quarter. Overall sales dollars were down 4% for the quarter to $1.18 billion. We are pleased that our unit sales increased 7% overall.

EBITDA for the quarter was up nearly 24% to $89.7 million. Year-to-date, EBITDA was $246.4 million versus $202.3 million in 2018. The bottom line focus resulted in terrific results. As we reported earnings of $51.9 million or $0.84 per share versus $0.66 per share in 2018. New product sales were $142.9 million for the quarter, year-to-date new product sales are $428 million which is 1% above the year-to-date budget. Our Dimensions project panels, as well as the decorators decking and railing are just a few of the growth products. As you know we use gross profit dollars per unit as a tool to measure performance, because it takes out the lumber market pricing as a variable. We were very pleased that our gross profit dollars grew by 18% more than double our unit sales increase.

Now I'd like to discuss our individual markets. Starting with the overall lumber market. The Southern Yellow Pine lumber market was fairly stable until September and finished the quarter, up $17 per thousand board feet over the quarter two ending value. Random length composite index followed a similar path of $24 over quarter two ending value. Both indexes have tapered off about $15 per thousand board, so far in October. Our quarter-end inventory values were 134.3% of September sales, which compares to 137.9% in Q3 of 2018. We continue to work the inventories down and we'll look for buying opportunities during the fourth quarter.

The retail market saw excellent unit growth of 10%, while sales prices were down 1.1%, a few drivers in retail where the increased sales of our Deckorators products and decking and railing which continue to take market share. We now have over 500 certified Deckorators and installers and we'll continue to find more professionals who love the ease of installing our Deckorators products. We also saw a good unit sales growth with our big box customers as well as our independent retailers with our pro-wood products and our outdoor essentials product.

We continue to drive our extended product line to independent retailers. In the construction market, we reported steady growth overall, with unit sales up 8%. Our backlog has increased for site-built components and we continue to add capacity in the markets we serve. Manufactured housing was slower in the third quarter while RV is not a significant part of our overall business. It did show a decline in shipments. We continue to promote value-added items rather than just driving top line revenue, which helped drive better gross profit growth. Concrete Forming also grew nicely in the quarter.

In the industrial market unit sales were up 4% for the quarter, this is a lower increase than expected. However, we are executing our strategy to increase our value-added sales and de-emphasized commodity type sales. In spite of the less than expected growth, our overall profitability improved. Our capital allocation strategy targets acquisitions at reasonable ROI based values first followed by greenfield growth and automation and efficiency projects. We have several acquisitions in the pipeline.

As a reminder, our focus areas for acquisitions include industrial targets, which help us achieve our objective of being in the global packaging solution provider. New products and brands in our retail market and new products and services in our construction market. In order to meet our desire to be the low cost producer and to grow our businesses we expect increased capital expenditures, including automation, for the foreseeable future. As always, we intend to use the remainder of capital generated for cash dividends and opportunistic share repurchases. Even with an outstanding quarter like we just had, we recognize that we have areas of improvement, which could yield even greater results in the future. For example, several of our operations are below their budget for operating profit. As always we continue to work with these operations to make the improvements necessary to get them at and above their targets.

Core SG&A increased 6.1% in line with unit sales growth. It declined as a percentage of gross profit to 49.8% compared to 55.4% last year, this is a very good trend. Production labor also remains one of our biggest challenges, recruiting and retaining employees is critical. We continually look at better ways to meet the challenges our employees face, from benefits to transportation and we strive to become an employer of choice in the locations in which we operate.

Our goal is to provide our employees with a solid long-term future with many opportunities for individual growth. These opportunities for growth include the exciting new structure we will implement in 2020. This new structure organized by markets and business units instead of geography will create a better focus on our customers needs and position our facilities to get more in depth with the markets they serve. We expect better innovation, faster product to market execution and more market intelligence. These changes will help our talented teammates to excel with their customers and enhance their ability to be the experts in their field. We believe this will help us grow faster and more profitably in the years ahead.

Now, I'd like to turn it over to Mike Cole, who will provide more details on our financial performance.

Michael R. Cole -- Chief Financial Officer

Thanks, Matt. I'll start with the lumber market. Lumber prices were down nearly 25% this quarter, which reduced our selling prices and sales dollars. Fortunately, the level of lumber prices has little impact on our profitability which is primarily driven by unit sales, value added sales mix and operating leverage, all of which continued strong trends into Q3. Lower lumber prices also reduced our investment in working capital, which has contributed to our strong cash flow for the year.

Moving to the income statement. Overall unit sales for the quarter increased 7% with all markets contributing to organic unit growth of 6%. Acquisitions contributed 1% unit growth this quarter. New products continue to be an important driver for growth and margin improvement and we're pleased to report a new product sales and gross profits were up 7% and 28% respectively for the quarter. For the year, new product sales were up 12% and we're on pace to achieve our annual goal of $525 million. Breaking down our sales by market, unit sales to the retail market increased by 10% organically. This growth was primarily due to our Deckorators branded product sales, new product sales and an increasing demand in several existing product lines with a big-box customer.

Moving on to the industrial market, unit sales to these customers increased by 4% with acquisitions contributing half of the growth. Organic unit growth was 2%, which was comparable to Q2, but somewhat lower than the mid-single digits we achieved in earlier quarters. This appears to be due to a combination of softer demand with existing customers and our emphasis on bypassing commodities sales to focus on value-added sales, with better margins. Sales to new customers, totaling almost 10 million drove our growth this quarter. Overall unit sales to the construction market increased 8% organically within the construction category unit sales increased 15% to commercial construction customers, 6% to residential and 1% to manufactured housing. Strong unit growth to commercial was primarily driven by IDX and gaining market share with a handful of existing customers, primarily in the Texas region.

Moving down the income statement. Third quarter gross profits increased by $29 million or 18% surpassing our 7% growth in unit sales as our profit per unit improved. The overall gross profit increase was comprised of a $14 million improvement in Retail gross profit and the $11 million increase in industrial. The remaining increase in gross profit was primarily related to more favorable labor and overhead cost variances.

In general, the primary drivers for our increase in profitability, continue to be value-added sales mix improvements, strong organic sales growth and leveraging fixed costs and lower lumber costs on sales of fixed-price products. We also had a more favorable lumber market trend in 2019, which resulted in a better profit per unit and sales of variable priced products.

Continuing to move down the income statement. SG&A expenses included almost $23 million of accrued bonus expense compared to a little over $14 million last year. SG&A, excluding bonuses was $93 million for the quarter, which was about $1 million lower than last quarter and $3 million below plan. Our accrued bonus expense increased by almost $9 million due to the increase in our pre-bonus operating profit and a higher bonus rate as a result of the increase in our return on invested capital.

As we mentioned last quarter, we're focused on lowering our SG&A as a percentage of gross profit, which mitigates the impact of lumber prices on sales and compensates for our favorable change in sales mix of more value-added products. We're pleased to report our SG&A as a percentage of gross profits dropped from 55% last year to 50% this year.

Driven by these positive factors, our operating profits increased 24% and our EBITDA increased 23% for the quarter, again, well in excess of our 7% increase in unit sales. Moving on to our cash flow statement, our cash flow from operations for the year totaled $198 million and was comprised of net earnings and non-cash expenses, totaling $195 million and a $3 million increase in cash flow due to a decrease in working capital since year-end. The decline in working capital is primarily due to a combinations of selling through of opportunistic purchases and the resulting buildup of inventory from the fourth quarter last year and lower lumber prices this year. We measure our cash cycle to assess our working capital management and for the third quarter it increased slightly to 52 days compared to 51 days last year.

Investing activities consisted primarily of capital expenditures totaling $66 million including expansion in CapEx of almost $22 million. We believe we will spend between $90 million and $100 million this year on currently approved projects. Notable areas of spend include projects to replace our capacity in South Florida, resulting from the sale of our Medley facility last year, expand capacity and enhance the productivity of our Deckorators decking product line due to favorable demand trends and share gains we've achieved, and several projects to expand manufacturing capacity, to serve industrial customers and achieve efficiencies through automation.

We've also spent $39 million so far this year to acquire Wolverine Wood, Northwest factory finishes and the remaining 50% interest owned by our partners in the United Lumber and most recently Pallet USA. Financing activities, primarily consisted of $39 million in net repayments on our revolver and $3 million in payments on other debt. We also paid over $12 million in dividends in June at a semi-annual rate of $0.20 a share, and a 11% increase over last year. With respect to our balance sheet and capital structure, our net debt was about $99 million at the end of Q3, compared to $191 million last year. The strength of our cash flow generation and balance sheet provides us with plenty of capital to grow our return to shareholders.

Our highest priorities for capital allocation are currently capital expenditures and acquisitions based on opportunities and the strength of potential returns we see, but we always seek the highest return for investors. So will adjust and allocate more to dividends or share buybacks if circumstances change.

That's all I have on the financials. Matt?

Matthew J. Missad -- Chief Executive Officer

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Ketan Mamtora with BMO Capital Markets.

Ketan Mamtora -- BMO Capital Markets -- Analyst

Good morning, Matt and Mike. And congrats on a good quarter.

Matthew J. Missad -- Chief Executive Officer

Good morning, Ketan. Thank you.

Ketan Mamtora -- BMO Capital Markets -- Analyst

First question just starting off with the strong organic volume growth that you also saw, in especially in retail and you all highlighted decorators but anymore, I'm just curious kind of where you are seeing strength as a particular kind of regions, end markets, any more color you all can provide on that would be helpful.

Matthew J. Missad -- Chief Executive Officer

Yeah, that's a good question, Ketan. I think what we noticed is particularly on the pro-wood product line this past quarter, it was pretty well across the country we saw solid growth. I think part of that customers' desire to increase their market share, so they improved a lot of unit sales. So that's, that would be the other area in addition to decorators, and I would say, but I don't think it was limited to any specific area, it was fairly broad-based.

Ketan Mamtora -- BMO Capital Markets -- Analyst

Understood. And then just turning to this kind of Beatle 2.0, what you are seeing out in Europe. Are you starting to see more Lumber come in from Europe and then I'm just curious if there are any differences in terms of end market applications for European lumber?

Matthew J. Missad -- Chief Executive Officer

Yeah, so as we've looked at -- there are some more opportunities for a European lumber today, a lot of at this price-driven, as you know and I think part of that ability we have in terms of our international sourcing capabilities really helps us to use that there are some different end markets. There are some substitutions for it particularly kind of the SPF species. So that does create some opportunities out there and we are noticing at least more recently here, there is an opportunity for us to continue to expand that.

Ketan Mamtora -- BMO Capital Markets -- Analyst

And Matt, are you seeing more lumber come in from Europe?

Matthew J. Missad -- Chief Executive Officer

Yeah, I couldn't quantify it for you, Ketan, but I do think there is a -- they're getting more aggressive from a sales standpoint. So I think they are looking for opportunities to move more product, which is always a good opportunity for us.

Ketan Mamtora -- BMO Capital Markets -- Analyst

Yeah, OK, that's helpful. And then just turning to sort of the industrial side, we've seen ISM Manufacturing fall below 50 industrial production numbers haven't been great recently. I'm just curious what you are hearing from your customers in terms of kind of activity and order books.

Matthew J. Missad -- Chief Executive Officer

Yeah, I think what we're seeing is still pretty stable, still pretty steady. I think there are certain industries, obviously that are less favored than others, but I think there is -- as many growth industries still as there are declining industry. So overall balance is pretty good. And as we mentioned, we're trying to de-emphasize some of the commodity stuff and looking at the more value-added stuff, so that's going to be one of the things we'll look forward to -- going forward just try to maximize profitability and -- on each sale.

Ketan Mamtora -- BMO Capital Markets -- Analyst

Got it, that's helpful. And then just last question from me, in terms of capital allocation, obviously the balance sheet is in a great shape. You've talked about kind of internal opportunities that you all have M&A, but I'm just curious, absent M&A and given where your balance sheet is, when do you think you get to a point where you say, what we aren't getting any sort of great opportunities, it is probably time to return some cash to shareholders. I'm just curious how you all are thinking about kind of cash on the balance sheet.

Matthew J. Missad -- Chief Executive Officer

Yeah, very fair question. As we look at it, obviously there is a fairly significant deal pipeline out there, a lot of companies are looking to sell, we tend to be pretty judicious buyers. We don't try to overspend, so we want to make sure that we can acquire companies that will allow us to still achieve our return targets, and in absent of that, that creates some opportunities to do more greenfield expansion, new product development and the number of the other initiatives that we have or we think we can grow the company and provide more long-term value to shareholders, if it gets to a situation where we have so much excess cash and share repurchases, don't look good. I'm certain, we'll look at our dividend policy and figure out a way to return more money to the shareholders. I don't think we're at that stage at this point, we're very comfortable where we are and having a lot of dry powder, I think is a good thing, right now.

Ketan Mamtora -- BMO Capital Markets -- Analyst

Got it. And then just on that sort of M&A point, are you seeing easing in valuation multiples on the industrial side?

Matthew J. Missad -- Chief Executive Officer

Yeah, I would -- I haven't noticed it yet. I think, I think there is certainly challenges there that we would expect that to be happening, but I think private equity and the kind of the relative cheapness of money out there, it's still -- there is some people out there, they're bidding I would call it irrationally. So we have to, we have to let that kind of flow through the market.

Ketan Mamtora -- BMO Capital Markets -- Analyst

Got it. That's very helpful color. I'll turn it over, good luck in the fourth quarter and into 2020.

Thank you.

Operator

Thank you. Our next question comes from Steve Chercover with Davidson.

Steve Chercover -- DA Davidson -- Analyst

Thanks, good morning everyone.

Matthew J. Missad -- Chief Executive Officer

Good morning, Steve.

Steve Chercover -- DA Davidson -- Analyst

So, just with respect to the rebranding that you guys are proposing for 2020, how visible is going to be to the outside world. For instance, once you officially present your results by segment instead of geography, we will be showing us, the operating profit for retail construction and industrial.

Matthew J. Missad -- Chief Executive Officer

Yes, merry Christmas.

Steve Chercover -- DA Davidson -- Analyst

Yeah, you want to give it to us a little early. So we can start calibrating properly.

Matthew J. Missad -- Chief Executive Officer

No, you can't be great if not even Thanksgiving yet so.

Steve Chercover -- DA Davidson -- Analyst

The ornaments are already showing up in the stores, but how do you guys feel about your markets today as compared to this point last year. I mean, obviously there's a lot of hand-wringing about the economy, but I never hear at your body language, and I think the sentiment toward at least the residential part of the economy is improving. So, maybe you can give us your feel.

Matthew J. Missad -- Chief Executive Officer

Yeah, we still feel very good about where we are and we still are looking at basically steady continued trends. We don't see anything out there, I mean obviously there is long term, you figure there's going to be some kind of slow down at some point but right now, things look pretty good and we're very optimistic about that.

As I mentioned, we're seeing some increased lead times and certain in the markets we serve anyway, and again as we talk about there is regional differences and I think people get a head fake if they look at just the national trends on certain things they don't compare until where our operations are regionally. So, right now I think we feel very good about where we are.

Steve Chercover -- DA Davidson -- Analyst

Okay. And last one from me, the lumber markets at this point last year were in a pretty sharp at [Indecipherable] and now they seem to be slowly strengthening. So do you think you'll get a chance, do you -- with the kind of opportunistic by that, was so beneficial in Q1 of this year?

Matthew J. Missad -- Chief Executive Officer

Yeah, it's always hard to say. I think, right now, last few weeks we've noticed a trend line as I mentioned that is actually a slight retreat. There is actually very little gap right now between, for kind of a Random lengths composite pricing index, it's much more narrow, there is still some room for the Southern Yellow Pine market between where it was a year ago and where it is today, we're still below that. So, I think there may be opportunities here, we're just going to have to wait and see but I really have a lot of confidence in our purchasing group and their ability to source product and to position us well. So I think we'll be OK.

Steve Chercover -- DA Davidson -- Analyst

Great, thanks Matt.

Operator

Thank you. And our next question will come from Reuben Garner with Seaport Global.

Reuben Garner -- Seaport Global Securities -- Analyst

Thanks, good morning everyone.

Matthew J. Missad -- Chief Executive Officer

Good morning, Reuben.

Michael R. Cole -- Chief Financial Officer

Hi Ruben.

Reuben Garner -- Seaport Global Securities -- Analyst

So let's see, maybe we can start with the, you talked about the reorganization of the rebranding efforts, and then Matt, you mentioned having some businesses that may be aren't operating. I think you meant you said that the targeted profitability levels. Can you -- can you elaborate more on those two items and how -- it sounds like the first one is more top line driven. The second one it sounds like you've got some things that you can do to improve margins in some of your businesses. Can you elaborate a little bit and maybe, is there any way to quantify what you think the benefit could be from either of those initiatives?

Matthew J. Missad -- Chief Executive Officer

Sure, yeah. I think starting with what we're looking forward to is our 2020 structure and that's the organization by segment and by business unit, but we think that will help us do as I mentioned was to be quicker to market, try and win out our new product initiative, getting the products ready for market and then getting them to market still takes fair amount of time and then once we get them ready and into the market, being able to scale them across our infrastructure throughout the country and hopefully throughout the world, it takes a little more time than it should today. So we think that we'll be able to move that process much quicker from launch to scalability than it is today that we're excited about that part and then will also allow our team to actually be the experts right now they're spread thin and a lot of different areas over thousands of different SKUs and products and trying to keep up with all that.

So by specializing we think we'll be able to serve our customers better and understand their market and their needs, better. So we're excited about that, part. With respect to budget to actual performance, as you know, each one of our operations is its own business and they have their own bottom line responsibility and as is typical, not every one of the operations exceeds their budgets and we spend our time trying to work with those that are below budget and I'm trying to get them back up to budget, and while there's not a lot of them, I can't really quantify the aggregate number, but for us it's meaningful and significant and we want everybody to be at or above their budget for the year.

We weren't -- we weren't there last year, we're not there this year, but we're improving, we still have -- we still have ways to go and so our goal is to get everybody above budget, and if we can do that, that would be a significant improvement in our overall performance and results.

Reuben Garner -- Seaport Global Securities -- Analyst

Thank you, Matt. That was helpful. I guess the reason I asked the latter part of the question was, in over call you kind of, and maybe it's just my bad memory, but I don't recall you calling that out before us. I don't know if it was just kind of continuous improvement type things or a new initiative or something you guys are working on. So that's why I asked the question, but anyhow, may be we were miss to go quarter without asking about decorators, 10% volume growth for the retail segment. I think you said in the press release that it was that a lot of it or large -- largely driven by decorators, can you give us anymore more, more color, it was a little bit surprising. I thought the load in kind of took place in the second quarter, is this is a continuation of the load-in. Is it new business that you're winning, what's driving it, and what kind of expectation should we have going forward is that a pretty big number?

Matthew J. Missad -- Chief Executive Officer

Yeah, I think if you look at it, the two big components for me were the decorators growth and the pro-wood growth, and I think, if I look at decorators, and as you may recall we really kind of loaded in probably in March and April. So this is continuation of that, reorders and other things of [Indecipherable] that's been solid as we said before, I think we estimated roughly $50 million over the first full year in which we had the products. So we're still in the process of getting to that level, with respect to the pro-wood, it's really just as I mentioned before, it's unit sales growth driven by customers' desire to take market share and that's -- that's been very, very helpful for us in Q3.

Reuben Garner -- Seaport Global Securities -- Analyst

Okay. So this is a continuation, it wasn't anything -- it wasn't any additional wins or anything.

Matthew J. Missad -- Chief Executive Officer

No.

Reuben Garner -- Seaport Global Securities -- Analyst

Okay. What, what -- can you remind us what you told us about decorators size wise where it is today as a part of your retail business and where do you think it can be over the next, I mean.

Matthew J. Missad -- Chief Executive Officer

Yeah, I will let Mike get to this. I'd like -- Mike give you the precise numbers?

Michael R. Cole -- Chief Financial Officer

On distributors that we've -- that we recently won, I would expect decorators decking and railing to be in the $160 million to $170 million run rate, annual run rate.

Reuben Garner -- Seaport Global Securities -- Analyst

Okay, that's all from me guys. Thank you.

Matthew J. Missad -- Chief Executive Officer

You bet. Thank you.

Operator

Thank you. I'm showing no further questions in the queue at this time, I would now like to turn the call back over to management for any closing remarks.

Matthew J. Missad -- Chief Executive Officer

Thank you. As you can tell, I'm excited about our team's exceptional performance, their hard work and extra effort has put us in a position to win our version of the World Series. As for the Nationals and the Astros we wish them both well, but current and former Tigers stands can take solace in the fact that no matter which team wins, they will have a former Tiger to thank for it. Thank you for your investment and trust in us, and thank you for your time today. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Brandon Froysland -- Director of Finance

Matthew J. Missad -- Chief Executive Officer

Michael R. Cole -- Chief Financial Officer

Ketan Mamtora -- BMO Capital Markets -- Analyst

Steve Chercover -- DA Davidson -- Analyst

Reuben Garner -- Seaport Global Securities -- Analyst

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