Universal Forest Products 'very lean' after a tough year

June 22, 2009
| By Pete Daly |
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Last year was "without a doubt, the toughest time in our company's history," according to Michael B. Glenn, CEO of Universal Forest Products Inc., founded in Grand Rapids in 1955.

Glenn quickly pointed out, however, that 2008 was a profitable year for UFPI.

"It wasn’t a huge profit, but in terms of the toughest time in our history, we were able to produce a small profit, and we're proud of that."

The forest products industry is among the hardest hit in the worldwide recession, but Glenn said he believes "we are at or near the bottom" now, and the industry may start experiencing slow, sustained growth around the middle of next year.

Last week the American Forest & Paper Association announced that new home starts dropped from a high of more than 2 million in 2005 to less than 500,000 now, which "has been devastating to our industry," said association President and CEO Donna Harman. Since 2006, the industry has lost more than 190,000 jobs in companies that produce lumber and wood building materials, according to the AF&PA.

The economic condition of the U.S. forest products industry is the “worst ever," according to Steve Chercover, a senior forest industry analyst with D. A. Davidson Co., a financial services company with headquarters in Montana.

"You're in Michigan, No. 1 in unemployment," said Chercover. "I'm in Oregon. We're No. 2 in unemployment. You guys got automobiles; we’ve got lumber. It's as bad as it’s ever been."

UFPI is a publicly held company with about 6,200 employees at about 85 facilities throughout the U.S., Canada and Mexico. It produces and distributes lumber, composite wood, plastic and other building products. It is one of the largest domestic buyers of solid sawn soft wood lumber from mills in the U.S. and Canada.

UFPI stock was trading for almost $80 in early May 2006; last November it briefly dropped below $16, but recently gained strength and was trading last week for almost $30 a share.

The company ended 2008 with net earnings of $4.3 million on net sales of $2.2 billion. That compared to net earnings of $21 million on net sales of $2.5 billion for 2007. Last year, one UFPI customer, The Home Depot, accounted for approximately 27 percent of total net sales.

In April, UFPI reported that it had incurred a loss of $1.2 million in the first quarter of 2009. However, industry analysts had predicted a significantly higher loss, so the first quarter results were actually encouraging. Glenn commented that UFPI is "pleased with results like these in tough economic times and in a quarter that historically comprises a slow selling season.”

Glenn said last week that UFPI has become "a very lean company through this transition."

No one company competes against UFPI in all four markets in which it is active, although it does have competition within each of those markets.

"One of our big competitors came up in the last month and said, 'We don’t anticipate making a profit until the year 2013,'" said Glenn.

UFPI isn't in that boat, he noted: "We're generating a profit. We're focused on growth. To be honest with you, we're now kind of excited," said Glenn.

First quarter sales for each of its market segments were:

- Do-It-Yourself/retail: $168.1 million

- Industrial packaging/components: $103.7 million

- Site-built construction: $60.8 million

- Manufactured housing: $36.6 million

Glenn said Lowe's and The Home Depot, both of which are UFPI customers in its DIY market, each have announced that their same-store sales "are off, anywhere from 8 to 10 percent, and they are not building new stores like they were in the past."

"We have no national competitor" in the DIY market, said Glenn. He noted that UFPI has "over a thousand SKUs" in DIY products.

UFPI separates its manufactured housing into two arenas: modular housing and what it calls HUD code housing. "In each one of those, we have 90 percent market share," said UFPI chief financial officer Mike Cole.

The annual report for 2008 states that UFPI believes it increased its market share in all of its markets with the exception of manufactured housing.

UFPI has had serious competition in the site-built construction market, but some of those major competitors are "financially distressed," according to Cole. One is Building Materials Holding Corp. of Boise, Idaho, a national supplier to home builders that is "very troubled," according to Cole. In May, Building Materials Holding reported that its sales for the first quarter of 2009 fell 51 percent from the $343 million it had in the first quarter a year ago, with a net loss for the quarter of $45 million.

Another very large competitor in site-built construction is Stock Building Supply of North Carolina, which entered Chapter 11 bankruptcy a few weeks ago. The company is owned by Wolseley PLC,  a large, publicly traded British conglomerate. In business for 80 years and previously known as Carolina Builders, Stock Building Supply has been in decline for more than two years, losing more than $200 million in fiscal 2008 on revenue of $3.5 billion. Two years earlier its annual sales were $5.5 billion. Right now scores of its facilities around the U.S. are closing.

UFPI has numerous small competitors in the industrial market, but it is its strongest market. The UFPI annual report on file with the SEC notes that while UFPI sales in the other three markets declined last year, "we continued to grow sales to the industrial market."

The recession depressed lumber prices by 11 percent in 2008, compared to 2007, which in turn reduced UFPI's prices, according to the annual report.

Nonetheless, "Universal is making money and there's a bunch of them that aren't," said Glenn.

Chercover noted that while some of the publicly held companies competing against UFPI won't survive, it is the public companies that have better access to capital, more so than privately held companies.

"God only knows what's happening to the private ones," said Chercover.

Cole said that at the onset of the economic downturn, "We had a real emphasis on generating cash flow and managing our working capital. … We generated a lot of cash flow over the last few years and we used that to pay down our debt." At the conclusion of FY2008, "we had only a hundred million of debt … and we continue to work that number down. The strength of our balance sheet is a real competitive advantage for us right now," he said, adding that "others tend to be very over leveraged, and that puts them at a lot of risk right now."

In 2006, UFPI unveiled a four-year growth plan, but since then, industry and general economic conditions have deteriorated significantly and lumber prices have dropped by about 49 percent, according to company estimates. Because of that, UFPI has a revised four-year growth plan it calls "Route 2012," covering 2009 through 2012. Those goals include an increase of sales to $3 billion, productivity improvement of 15 percent, and reducing the amount of receivables paid past the due date in the industrial, site-built and manufactured housing markets.

"As our competitors are kind of hunkering down and trying to hang on, we're focused on growth," said Glenn. "Right now, we are looking at growing our company and going to $3 billion in sales."

Chercover said he considers UFPI "kind of a best of breed. For what they do, I don't know anyone who really comes close to them, when it comes to efficiently taking commodity lumber and adding value to it."

"They're not happy with their financial performance," said Chercover. "They've had to make tough decisions with respect to staffing and eliminating facilities, not just jobs."

UFPI is "not having a lot of fun right now," added Chercover. "But I think they'll have fun again when things come back — and it will come back. We're not going to outsource our home-building industry to China or Korea or anywhere else."

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