Universal Forest (UFPI) Tops Q3 Earnings, Sales Growth Solid

Building products company, Universal Forest Products Inc. (NASDAQ:UFPI) reported record results for the third-quarter 2017. Results were driven by double-digits growth in the three business segments, partially offset by higher cost of sales and operating expenses.

Net earnings per share in the quarter came in at $1.64, increasing 21% year over year and surpassing the Zacks Consensus Estimate of $1.43 by 14.7%.

Solid Segmental Performance Drives Top-Line

The quarter’s net sales were $1,056.6 million, exceeding the Zacks Consensus Estimate of $996.5 million by roughly 6%. On a year-over-year basis, the company’s net sales grew 28%. Sales growth in three end market-based segments — Retail Building Materials, Industrial, and Housing & Construction — were healthy.

Unit sales growth was 22%, including 7% organic growth and 15% from acquired assets. Also, favorable pricing added 6% to the quarter’s sales growth. New product sales improved roughly 21.7% year over year to $107.7 million, driven by benefits from approximately 35 new products launches since the beginning of the year. Roughly 12 new products were introduced in the third quarter.

Segmental Performance: The company’s segmental sales sum up to total gross sales. In the quarter, the company’s gross sales totaled $1,071.4 million, up 28% year over year. A brief snapshot of end-market sales has been provided below:

Retail Building Materials (36.6% of third-quarter gross sales): The segment’s sales totaled $391.9 million, reflecting growth of 16% over the year-ago quarter. Organic sales grew 5% while favorable pricing and acquisitions benefitted by 4% and 7%, respectively. Businesses from big box and independent customers strengthened further.

Industrial (34.5%): Sales in the segment surged 59% to $369.5 million on the back of synergistic benefits from acquisition of idX Corporation (closed in September 2016) as well as healthy businesses from new and existing customers.

Organic sales grew 11% while gains from price increases and acquired assets added 5% and 43%, respectively.

Housing and Construction (28.9%): Segmental sales were $310 million, up 16% year over year due to impressive business from residential construction and manufactured housing customers.

Unit sales in the quarter grew 8% while increase in prices added 8% to sales growth.

Weak Margins

Universal Forest Products’ margin profile suffered from higher costs and expenses. As a percentage of revenues, the company’s cost of sales increased 60 basis points (bps) to 86.3%. Gross margin decreased 60 bps to 13.7%. Selling, general and administrative expenses were roughly $92.4 million, accounting for 8.7% of net sales. Operating margin was down 40 bps to 4.9%.

The company noted that lumber market volatility caused by the adverse impact of hurricanes (Harvey, Irma and Maria) adversely impacted its margin in the third quarter.

Balance Sheet & Cash Flow

Exiting the third quarter, Universal Forest Products had cash and cash equivalents of $22 million, below $24.6 million recorded in the preceding quarter. Long-term debt declined 28.8% sequentially to approximately $145.9 million.

In the first nine months of 2017, the company generated net cash of $97.4 million from its operating activities, below $136.4 million in the year-ago period. Capital spent on purchase of property, plant and equipment amounted to $57.2 million, up from $35.7 million used in the year-ago period. Shares worth $13 million were repurchased while dividend of $9.2 million was distributed in the nine months ended September 2017.

Our Take

In the quarters ahead, addition of customers, benefits from new product launches and acquired assets as well as improvement in margin profile might be the prime catalysts driving the company’s results.

However, the company’s businesses are directly influenced by the U.S. housing market. Any untoward situations will produce an unfavorable impact on its sales, earnings and cash flow. Also, it faces competition from other players in the industry like Louisiana-Pacific Corporation (NYSE:LPX) , Potlatch Corporation (NASDAQ:PCH) and Weyerhaeuser Company (NYSE:WY) .

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