Q3 2019 Earnings Call

October 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 then the filings with the Securities and Exchange Commission.

It is that same spirit that drives each member of the U.S.P. family of companies around the globe.

Our goal this year wants 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 and profit and earnings per share well growing sales units by 7%.

Want to thank them for their outstanding performance.

We are so driven to improve we not only will be pushing to finished 2019 strong. We're 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 28 team.

The bottom line focus resulted in terrific results as we reported earnings of 51.9 million or 84 cents per share versus 66 cents per share in 2018.

Year to date, new product sales or 428 million, which is 1% above the year to date budget.

We were very pleased that our gross profit dollars grew by 18% more than double our unit sales increase.

The southern yellow pine lumber market was fairly stable until September and finished the quarter up $17 per thousand board feet or the quarter to ending value.

Random lengths composite index, followed a similar path up $24 over quarter to ending value.

Both indexes have tapered off about $15 per thousand board, but so far in October .

Our quarter end inventory values were 134.3% of September sales, which compares to 137.9% in Q3 of 28 team.

The retail market saw excellent unit growth of 10%, while sales prices were down 1.1%.

A few drivers and retail where are the increased sales of our decorators products and decking and railing, which continue to take market share.

We now have over 500 certified decorators installers, and we'll continue to find more professionals, who love the ease of installing our decorators products.

We also saw good unit sales growth with our big box customers as well as our independent retailers with our pro wood products and our outdoor essential products.

We continue to drive or extended product line to independent retailers.

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.

Wow RV is not a significant part of our overall business. It did show a decline in shipments.

Concrete forming also grew nicely in the corner.

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.

In order to meet our desire to be the low cost producer and to grow our businesses, we expect increase 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.

For example, several of our operations are below their budget for operating profit.

As always we continue to work with these operations to make improvements necessary to get them at and above their targets.

We continually look at better ways to meet the challenges our employees space 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.

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 experts in their field.

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

Fortunately the level of lumber prices has little impact on our profitability, which is primarily driven by unit sales.

You added sales mix and operating leverage all of which continued strong trends into Q3.

Moving to the income statement.

New products continue to be an important driver for growth and margin improve them and we're pleased to report new product sales and gross profits were up 7% in 28% respectively for the quarter.

Customers totaling almost 10 million drove our growth this quarter.

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.

We also had a more favorable lumber market trend in 2019, which resulted in a better profit per unit on sales of variable price products.

Continuing to move down the income statement.

DNA expenses included almost 23 million of accrued bonus expense compared to a little over 14 million last year.

SGN, 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 to the increase in our return on invested capital.

We're pleased to report our SGN 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 onto our cash flow statement, our cash flow from operations for the year totals 198 million and was comprised of net earnings and noncash expenses totaling 195 million and a $3 million increasing cash flow due to a decrease in working capital since year end.

The decline in working capital is primarily due to a combination of selling through opportunistic purchases and the resulting buildup of inventory from the fourth quarter last year and lower lumber prices this year.

Customers and achieve efficiencies through automation.

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 returned 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, we'll adjust and allocate more to dividends or share buybacks if circumstances change so having the financials Matt.

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

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound King please standby, while we compile the Q and a roster.

My first question comes from key Mamtora with BMO capital markets.

Good morning, Mike Mike Congrats on a good.

So and especially in retail and young.

That does but any more I'm just curious kind of.

You are seeing strength.

I don't have regions end markets anymore.

I would be helpful.

Yes, that's a good question gate and I think what we've noticed is particularly on the pro wood product line. This this past quarter. It was.

Pretty well across the country, we saw solid growth.

Part of that customers desire to increase their market share. So they improved a lot of unit sales.

So thats that would be the other area. In addition to decorators that I would say, but I don't think that it was limited to any specific area. It was fairly broad based.

Two point.

We'll see more numbers come in from New York, and then I'm just curious.

Any differences and end market obligations for European lumber.

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 substitution sport, particularly kind of the Sps.

Species, so that does create some opportunities out there and we are noticing at least more recently here. There's a there's an opportunity for us to continue to expand that.

Are you seeing more lumber coming from Europe .

Yeah, I couldn't quantify it for you keep tonight, but I do think theres, they're getting more aggressive from a sales standpoint, so I think they're looking for opportunities to move more product, which is always a good opportunity for US yes. Okay. That's a that's helpful and then just.

Same manufacturing.

50, industrial production numbers haven't been great recently I'm just curious.

Yes, I think what we're seeing is still pretty stable still pretty steady I think theres certain industries, obviously that there are less favored than others.

But I think there's as many growth industries still as there are declining industry. So overall balances pretty good and as we mentioned, we're trying to deemphasize some of the commodity stuff and looking at the more value added stuff. So.

That's going to be one other things, we'll look forward to going forward, just try to maximize profitability and on each sale.

Got it.

In terms of capital allocation, obviously, the balance sheet isn't in great shape.

Okay.

Opportunities that you all have money, but I'm, just curious absent M&A and given.

She is.

When do you paying.

Beyond getting.

Thanks.

I'm just curious.

I kind of cash on the balance sheet.

Still achieve our return targets.

And and a number of the other initiatives that we have where we think we can we can grow the company and provide more long term value to shareholders. If it gets to the situation, where we have so much excess cash and share repurchases don't look good I am 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.

Thing in valuation multiples on the industrial side.

Yeah, we haven't noticed it yet I think I think there's 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 a theres. Some people out there there are bidding I would call irrationally.

So we after we have to let that kind of flow through the market.

Got it.

Good luck in the fourth.

Thank you.

Thank you. Our next question comes from Steve <unk> Davidson.

Thanks, Good morning, everyone.

Hey, Steve.

So just with respect to the rebranding that you guys are proposing for 2020.

How visible is good because the outside world for instance, once you officially present results by segment instead of geography, we'd be showing us the operating profit for retail construction and industrial.

Yes Merry Christmas.

Hey, Bill you want to give it to its little early so we can start calibrating properly.

Now you can be great if not even thanksgiving yet so all the ornaments are already showing up in stores, but.

Uh huh.

How do you guys feel about your markets today as compared to this point last year I mean, obviously, there's a lot of handwritten, but the economy, but I never here at your body language and I think the sentiment towards the residential part.

I want to me is improving so maybe you can give us your you feel.

Yeah, we still feel very good about 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's long term you figure there is going to be some kind of slowdown at some point.

Right now things look pretty good.

And we're very optimistic about that as I mentioned, we're seeing some increased lead times.

Certain into markets, we serve anyway and again as we talk about there's there's regional differences and I think.

So.

Right now I think I think we feel very good about where we are.

Okay and last one for me the lumber markets at this point last year were in pretty sharp retreat and now they seem to be slowly strengthening so you think you'll get a chance to do the kind of opportunistic by that.

Beneficial in Q1 of this year.

Yes, it's always hard to say I think right now the last few weeks, we've noticed a trend line as I mentioned that is actually a slight retreat. There is.

There is actually very little gap right now between for kind of a random lengths composite pricing index, it's much more narrow.

The there's still some room for the southern yellow pine market between where it was a year ago and where it is today.

You know there maybe opportunities here, we'll just kind of have to wait and see but I really have a lot of confidence in our purchasing group and their ability to source product and.

Position us well so.

I think will be okay.

Thanks.

Thank you and our next question will come from Rueben Garner with Seaport global.

Okay.

So let's see maybe we can start with the you talked about the the reorganization of the re branding.

Efforts and then not you mentioned.

In some businesses that maybe aren't.

Can you can you elaborate more on those two items and how it sounds like the first ones more topline driven the second one it sounds like you've got some things that you can do to improve margins and some of your businesses can you can you elaborate a little bit and maybe is there any way to quantify what do you think the benefit could be for from either those initiatives.

Sure, Yes, I think starting with what we're looking forward to is our 2020 structure.

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 it would have their new product initiative getting the products.

Ready for market and then getting them to market still takes a 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.

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.

Got it is today that we're excited about that part and then we will also allow our team tail to actually be the experts.

Right now, they're spread Dan and a lot of different areas over thousands of different skews in products and trying to keep up with all that so by specializing we think we'll be able to serve our customers better and I understand their market in 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 its own business and they have their own bottom line responsibility and as is typical.

Not every one of the operations exceed their budgets and we spend our time trying to work with those that are below budget and trying to get them backup the budget and.

While there is not a lot of home I can't really quantify the aggregate number but for us, it's 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 results.

Thank you and that those helpful. I guess the reason that the latter part of the question was.

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 color I was little bit surprising I thought the load and.

Got it took place in the second quarter is this is this a continuation of the load in is it new business that you're winning what's what's driving it and what kind of expectations should we have going forward thats, a pretty big number.

Yes, I think if you look at it to the two big components for me, where the decorators growth and the pro would growth.

And I think as I look at decorators.

Full year in which we had the product. So we're still in the process of getting to that level.

With respect to the pro would it's really just as I mentioned before it's a unit sales growth driven by customers desire to take market share and that's that's been very very helpful for us in Q3.

Okay. So this is a continuation of wasn't anything wasnt anything additional wins or anything.

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'll, let Mike if I like might give you that precise numbers yes.

That's fair gains that we've that we recently won.

I would expect that creators decking and railing being 160 270 million.

Annually.

Okay. That's all for me guys. Thank you.

Thank you.

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.

As for the Nationals, and the Astros, we wish them, both well, but current and former Tiger spans can take solace in the fact that no matter, which team wins.

We'll 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.

Q3 2019 Earnings Call

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