Lynn Afendoulis - Director of Corporate Communications Matthew Missad - Chief Executive Officer Michael Cole - Chief Financial Officer

James McCanless - Sterne Agee

Good day, ladies and gentlemen, and welcome to the Quarter Two 2015 Universal Forest Products, Inc. Earnings Conference Call hosted by Matt Missad, CEO. My name is Tracy and I will be your operator for today. At this time all participants are in listen-only mode. We'll conduct a question-and-answer session towards the end of this conference [Operator Instructions]. As reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Lynn Afendoulis. Please proceed.

Thank you. Welcome to the Universal Forest Products, Incorporated second quarter 2015 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 in its entirety to all interested investors and news media through a webcast at www.UFPI.com. A replay also will be available at that website through August 16, 2015. Before I turn the call over to Matt Missad let me remind you that yesterday's press release and today's presentations made by our executives 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 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 would like to turn the call over to Matt Missad.

Thank you, Lynn, and good morning, ladies and gentlemen. Thank you very much for joining us this morning. It's been a great six months in 2015 as we celebrate our 60 years in business. And we closed out the second quarter with our highest profit month in our history. We also know that the score only matters at the end of the game and we will be working hard to win all year long. I want to thank our vendors and customers and especially all of the hard working women and men who create these results. A quick review of our key focus areas is as follows. Second quarter sales were $850.8 million, an 8.5% increase over 2014. Year-to-date sales were up $146.6 million over 2014 to nearly $1.5 billion. By market for the second quarter sales growth was as follows. Retail was up 8.3%; construction was up 1.3%, and industrial was up 16.9%. Now the overall lumber market declined 12.6% year-over-year for the quarter and the prices for Southern Yellow Pine decreased 6.5% year-over-year for the quarter. The lumber market declined steadily late April through May, firmed up in late June and is mixed in early July. So we'll keep a close eye on the lumber market. Overall unit sales were up almost 10%. The profit goals, the second quarter net earnings increased 19.2% over 2014 to $26 million. EBITDA for the first half of 2015 is $83 million compared with $67 million last year. And overall our EBITDA margins for the latest 12 months were 5.6% versus 4.6% for the same period a year ago. As for inventory it’s still up more than it should be at $330.2 million. As a percent of current month sales it is 125.2% versus 111.1% a year ago. Now it has dropped since the end of quarter one and we expect it to be more in line with sales by the end of the third quarter except for position buys. Finally, accounts receivable is currently at 92.3% current, and our write-off percentage for the quarter is less than one-tenth of 1% of sales. We were able to post these results in spite of a few challenges such as the declining lumber market, which I mentioned, as well as some challenging weather in certain parts of the country including record rainfall in Texas. I don't talk about weather as an excuse, rather I mention it to make sure all of us understand that we can and will perform even better. Now I would briefly like to discuss some of our strategic priorities for 2015 and beyond. Our new product sales initiative continues to meet our expectations. Year-to-date new product sales through June are $120.3 million and we are well on track to hit our goal of $190 million in new product sales for this year. As for personnel, another one of our key areas, we continue to expand our training and recruiting efforts to make sure our pipeline is full of leaders who can drive our business forward. Part of this additional staffing is reflected in our SG&A cost as we invest in people for our future. Acquisitions growth has been a challenge. We have been diligently pursuing acquisition opportunities throughout our target markets. While we have several viable candidates, as you can imagine, evaluations remain a challenge. We have watched announcements for mergers like BFS and ProBuild, stock in BMC as well as acquisitions of US LBM and expansions by CanWel. We remain committed to making sure we can achieve a solid return on our investment on our acquisitions and help us grow our company. But given our ROI targets we think that our shares are currently a much better value than paying 10 times trailing EBITDA for an unknown entity. Transportation is another one of our focus areas, and while there is still a pronounced shortage of drivers we have been able to manage effectively through this issue. We continue to carry extra safety stock to make sure we can service our customer’s needs. Overall we remain excited about our prospects going forward and I have tremendous confidence and faith in our team. We continually seek out new avenues for growth which complement and enhance our existing businesses. Now I would like to turn it over to Mike Cole, our Chief Financial Officer, to review in more detail our financial performance and condition.

Thanks, Matt. Before we begin the financials I should briefly address the impact of the lumber market this quarter. Overall lumber prices were down almost 13%, but southern yellow pine prices, which are a high percentage of our volume, were down only 6% for the quarter causing much less impact on our overall sales levels than one might expect. Moving on to our income statement highlights, our overall sales for the quarter increased 8.5% due to a 10.5% increase in unit sales offset by a 2% decrease in selling prices. Unit sales increased due to a combination of organic and acquisition related growth as businesses we acquired since Q2 of last year contributed 3% to our overall unit growth, while our organic growth totaled 7.5%. Pine market sales to the retail market increased 8% driven by an increase in unit sales. Unit sales increased due to a combination of market share gains, improved consumer demand and our new product sales initiative. It's worth noting that our sales to big box customers grew 12% this quarter and our new product sales grew by almost 20%. Our sales to the industrial market increased 17% due to an increase in unit sales. Recently completed acquisitions drove about 11% of our unit increase this quarter, while the remaining 6% organic growth resulted from share gains with existing customers, as well as adding many new customers. Our overall sales to the construction market increased 1% due to a 5% increase in units offset by a 4% decrease in selling prices. Our greatest unit sales growth continues to be with customers that buy concrete forms as we continue to gain share. Our unit sales to manufactured housing and residential construction customers increased by 2% and 3% respectively. Moving down the income statement, we are very pleased to report our second quarter gross profit increased by 16% and almost 90 basis points as a percentage of sales. The increase in our profitability and margins this quarter was driven primarily by our growth in sales, and improvement in our sales mix with industrial customers, continued improvements in our profitability on sales to the residential construction market and the growth of our business with retail customers. One of the challenges we faced this quarter was a lumber market that dropped 10% since the end of Q1, which typically hurts our profitability on products like treated lumber. We were able to withstand that dropped and improve our overall margins due to a number of factors, including continued improvements in our sales mix of value added products and the balance of our markets. SG&A expenses increased year-over-year for the quarter by $9.4 million, or 16%. By expense category our overall increase in SG&A included a $3.4 million increase in wages and benefits primarily related to greater headcount and another $3.1 million increase in incentive compensation tied to profitability. I also want to point out that our core SG&A expense without our bonus incentive remained flat at about $57 million comparing Q1 and Q2. Overall we are very pleased to report that our growth and gross margin improvements drove a 20% increase in our operating profits this quarter. Moving on to the cash flow statement, our cash flow used in operating activities improved by $14 million to $37 million so far this year and was comprised of net earnings of about $38 million along with non-cash expenses of $21 million offset by a $22 million increase in working capital due to our growth. Investing activities included capital expenditures of about $28 million, including expansion area and efficiency CapEx of over $10 million. We still plan to spend approximately $45 million on capital expenditures for the year. With respect to our balance sheet, at the end of June we had $38 million outstanding on our revolving credit facility that has a total availability of $295 million. As a reminder, the increase in our revolver since year-end is simply due to our seasonal increase in working capital which will then decline throughout Q3. We expect our cash flow will be strong in the back half of the year due to solid earnings, seasonal working capital reductions and as we bring our inventory levels in line with internal targets. That's all I have on the financials, Matt.

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

[Operator Instructions] Your first question comes from the line of James McCanless from Sterne Agee. Please go ahead.

Morning, guys. How are you?

Morning, Jay.

Morning, Jay.

I apologize, I jumped on a little bit late. Could you reiterate your comments on the lumber market, Matt, and then also maybe give us some context for the commentary you had in the release about the consolidation in the lumber market potentially being helpful to UFPI?

Sure. Yes, the overall lumber market changes - the decline year-over-year for the quarter is 12.6%. Southern yellow pine prices decreased 6.5% year-over-year and in timing of the lumber market movement the lumber market declined steadily from late April through May and firmed up in late June and is now mixed so far in July. That's basically the lumber market we are seeing. We are seeing a lot of consolidation in the industry both at the mill level as well as some of the other acquisitions that I mentioned. And from our standpoint we've looked at this has been a lot of excess capacity in the marketplace and this will help eliminate some of that excess capacity. And I think it will be a positive thing in the future for both pricing and for the environment of making sure we are not in a overcapacity situation.

Have you worked to see some of the ability to leverage may be less people in the market buying the logs? Have you already been able to leverage that with your suppliers?

I really wouldn't comment on that, Jay.

Okay. The second thing I wanted to ask and I think this is the second quarter in a row where you guys have really talked about it, but how should we think about the new products rolling out? I know you gave the guidance for $190 million in new product sales but is that going to continue to be a double-digit unit driver in both industrial and in retail for an extended period? Is one, and maybe industrial going to have a little bit longer stream of growth than what we're going to see out of retail?

Yes, I think as you look at just kind of relative market potential, obviously the retail channel is tied in with repair and remodel and we are - our new products help us expand the percentage of growth that we can get out of that. Otherwise we're pretty much bound to the amount of growth in the overall repair and remodel market in both DIY and independent retail. As you look at some of the other markets there's a lot more headroom in industrial and other areas where we can grow by taking more market share and also benefiting from the growth in the market.

Okay. Well, that sounds good. Thanks, guys, I appreciate it.

Thank you.

Your next question comes from the line of Steve Chercover from D.A. [ph] Please proceed.

Good morning, Matt. Hi, Mike.

Good morning, Steve. How are you?

Doing great. Thanks. So I like the comment that June was the highest profit month in history, is that what you said?

I did say that.

Like it, good. Well, and I recognize that residential construction is not the primary focus of UFPI, but still given your comments we know that the first half was kind of slow on the housing side and you had those biblical floods in states like Texas. So given the permit applications and better weather subsequently, are we going to see a pretty strong second half from you guys?

If you're asking for a prediction I would - if the housing market continues to grow in the areas where we have our facilities I think we'll do very well.

Well, was it growing pretty well in the first half?

I think I will complement our team at doing a great job. I think we have really good sales volume and you are right, there was certain pockets where weather is an impact. And there certain areas, particularly in the north, where I would expect to see better performance than you would see typically in the first quarter, primarily due to just weather.

Got it. And SG&A, I thought was under pretty good control, so I think Mike said the core SG&A was flat at $57 million. Should we target a run rate or a percentage of sales that you hope to replicate?

Yes, I think one of the areas that we look at there and Mike correctly pointed out that the sales incentive and the incentive compensation are driven based on profit, not sales and our profit is growing at a more rapid rate than sales. So you have to take that into consideration. The other part of it is, frankly, we are investing in people for growth purposes. But at the same time it is one of our focus areas and our goal is to make sure that we do reduce the rate of growth in SG&A to less than overall sales increases. But you have to take out the incentive compensation programs in order to make that connection.

Got you. And perhaps I missed this in the release but I think you obviously said you would rather buy your stock then other companies unknown at 10 times EBITDA. How many shares did you retire in the quarter if any?

We didn't buy back any stock in Q2.

Okay, great. Thank you both.

All right, thank you.

Thank you for your questions. I would now like to turn the call over to Matt Missad for closing remarks.

Well, thank you again and thank you for your investment in us. We are very proud of our 60 years in business and thankful that the founders and the builders of the company gave us such a terrific platform from which to grow. Our goal is to make them and their descendants, as well as our current and future shareholders proud of what we add to the legacy. Thank you again and have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.