Builders FirstSource Inc (BLDR) 2007 Q1 法說會逐字稿

Hello, and welcome to Builders FirstSource fiscal 2007 first quarter earnings results conference call. Your host for today's call is Floyd Sherman, Chief Executive Officer. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. Any reproduction of this call in whole or in part is not permitted without prior written authorization of Builders FirstSource. And as a reminder, this conference is being recorded today, April 27, 2007.

I would like to turn the call over to [Marcy Heider], Builders FirstSource Director of Financial Reporting, who will begin the call. Please go ahead.

Good morning, and thank you for joining us to discuss our first quarter 2007 financial results. We issued a press release after the market closed yesterday. If you don't have a copy, you can find it on our website at bldr.com.

Before we begin, I would like to remind you that during the course of this conference call, management may make statements concerning the Company's future prospects, business strategies, and industry trends. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties which could cause actual results to differ materially from expectations. Please refer to our most recent Form 10-K filed with the Securities and Exchange Commission and other reports filed with the SEC for more information on those risks.

The Company undertakes no obligation to publicly update or revise any forward-looking statements. We have provided reconciliations of non-GAAP financial measures to their GAAP equivalents in our earnings press release, and detailed explanations of non-GAAP financial measures in our Form 8-K filed yesterday, both of which are available on our website.

At this time, I will turn the call over to Floyd.

Thank you, Marcy. Good morning and welcome to our first quarter 2007 earnings call. Joining me from our management team are Kevin O'Meara, President, Chief Operating Officer, and Charles Horn, Senior Vice President and Chief Financial Officer. I will start with an overview of the first quarter and then we will turn the call over to Charles, who will discuss our financial results in more detail. After my closing comments regarding our outlook, we will take your questions.

We continue to face very challenging market conditions during the first quarter. Our sales were $411.1 million, down 30.2% from the first quarter 2006. The combined impact of decreased housing starts and lower market prices for lumber products reduced our sales by an estimated 41.9%. However, we partially offset the negative macroeconomic factors through marketshare gains and new facilities, which had a combined positive effect of 11.7%. Notably, we grew marketshare without sacrificing gross margins, which were down only slightly to 25.4% compared to 25.5% for the first quarter last year.

Net income for the first quarter was [2/10 million], or $0.01 per diluted share compared to $19.3 million or $0.54 per diluted share in the same quarter last year. EBITDA was 3.2% of sales compared to 7.4%. Our return on net assets calculated on a trailing 12 month basis was 21.9% compared to 34.7% a year ago.

Last fall, we outlined our plan for managing through the housing downturn, and we still believe this is the right strategy given the current market conditions. As a reminder, this plan includes generating incremental sales through marketshare gains and new operations, maintaining margins, reducing costs, and conserving capital.

You will note as Charles walks through our financial results in more detail, that we've done an outstanding job executing on this plan. In this environment, we are managing our business day to day adjusting to customers (technical difficulty) I'm proud of the ongoing effort companywide to seek new business and operate as efficiently as possible. Charles?

Thank you, Floyd. Hello, everyone. We'll begin by walking you through sales for the quarter. Our sales for the first quarter were $411.1 million, a decrease of 30.2% from the same 2006 period. As our sales volumes declines, 24.5% and sales prices fell 5.7% due to lower market prices for lumber and lumber sheet goods. However, our key deliverables felt gains for marketshare growth and new operations, met or exceeded our plans for the first quarter. These controllable sales drivers helped to mitigate the substantial decline in housing starts in our markets during the quarter.

Breaking down our sales drivers for the quarter, first, we estimate that housing starts within our markets declined to 36.2%. Second, lower market prices for lumber and lumber sheet goods negatively impacted our sales by 5%. Inversely, if we move to our two controllable drivers, our marketshare gains exceeded our expectations and netted an estimated 9.5 percentage points to our sales growth for the first quarter. We believe our valuated products and services give us a competitive advantage, helping us attract new business during this downcycle.

And fourth and lastly, new operations had a positive impact on sales growth of 2.2%. We continued to improve our sales mix during the quarter, transitioning from commodity items to higher margin valuated products and services. We felt the negative impact of decreased housing starts across all products categories. However, lumber, lumber sheet goods and prefabricated components experienced sharper declines in our other categories. The decline in these two categories can be attributed to the condition that more houses are being finished than are being started. And these two categories are obviously heavily influenced by commodity price inflation.

If we look at our product categories, lumber, and lumber sheet goods declined to $91 million or 44.3% and fell to 27.9% of our total sales. The majority of the decrease was attributable to lower unit volumes, which had a negative effect of approximately $57.6 million. The remainder was due to lower market prices for commodity lumber products.

Prefabricated components decreased 31% from the prior year quarter due to a combination of lower volume and lower raw material prices. This product category represented 20.5% of total sales for the quarter. Windows and doors was down 19.9% and represented 22.5% of total sales. Millwork also decreased 24.3% and represented 9.5% of total sales. Lastly, other building products and services decreased 13.9% and represented 19.6% of total sales. The sales decline in this category was partially offset by our ability to grow our Turnkey installation services. Please refer to the table included in our press release for additional first quarter sales data by product category.

Looking at gross margins, our overall gross margin was down only slightly at 25.4% of sales compared to 25.5% for the first quarter of 2006. We were able to mitigate substantial pricing pressure from our customers with labor efficiencies and other cost reductions. The previously mentioned decrease in lumber prices largely contributed to the $45.8 million decrease in gross margin dollars. If market conditions deteriorate and create increased competitive pressure, we may not be able to maintain these margins during the remainder of 2007.

Our selling, general and administrative expenses were $97.5 million, down $14.7 million compared to the prior year quarter. Included within our SG&A expense was incremental stock compensation of $1.0 million for the quarter. On a year-over-year basis, our SG&A expense excluding this incremental stock compensation expense decreased 14% while our sales volume declined 24.5%. Our salaries and wages expense excluding the incremental stock compensation expense decreased 19.2% for the quarter while our full-time equivalent employee headcount decreased 17.9%. As a percentage of sales, however, first quarter SG&A expense increased from 19.1% in 2006 to 23.7% in 2007.

It is important to note that the commodity deflation impact of $33.5 million inflated SG&A as a percentage of sales by 180 basis points. In addition, the incremental stock compensation expense during the quarter inflated SG&A's percentage of sales by 24 basis points. We continue to monitor our operating cost structure and make adjustments as we consider necessary.

Our net interest expense was $6.7 million for the first quarter, down $0.5 million from the first quarter of 2006. The decrease was primarily attributable to increased interest income related to our growing cash balances. These items were partially offset by higher interest rates during the first quarter of 2007.

Our effective tax rate decreased from 37.7% to 37.1% for the first quarter, due to the difference in the allocation of income among our taxing jurisdictions. We expect our tax rate for the year to be 35%. Net income for the quarter was $0.2 million or $0.01 per diluted share compared to $19.3 million or $0.54 per diluted share in the same period last year. Diluted weighted average shares outstanding for the quarter were $36.2 million compared to $36 million in the same quarterly period last year.

EBITDA for the 2007 first quarter was $13.1 million compared to $43.3 million in the prior year quarter. EBITDA as a percentage of sales decreased to 3.2% from 7.4% in the 2006 first quarter. If we look at our balance sheet, we've continued to focus on working capital and we've continued to diligently manage it. However, the significant decline in sales continues to have a negative impact on our inventory turns.

Average working capital was 11.6% of sales compared to 9.0% in 2006. However, we have seen improvement in our accounts receivable days and accounts payable days since the fourth quarter of last year as we adjust to market conditions. As of March 31, 2007, cash on hand was $114.6 million and funded debt was $314.8 million. We did not prepay any of our debt during the quarter and are debt to EBITDA ratio is approximately 1.5 times.

Our commitment to tightly managing our working capital, reducing expenses and conserving capital result in strong operating cash flow of $21.7 million for the quarter compared to $3.8 million reported in the first quarter last year. Capital expenditures were $2.6 million, down significantly from $6.1 million for the prior year quarter. We still anticipate 2007 capital spending to be considerably less than 2006 and range from 14 to $16 million.

I will now turn the call back over to Floyd for his closing comments.

Thank you, Charles. Given the current market weakness, we think difficult market conditions affecting our business will continue to have negative effect on our operating units through the end of 2007 and possibly into 2008. To help guide you through the market uncertainties, we will continue to provide updated housing permit and commodity price data on our website each month. This data is summarized and based on publicly available information. However, we believe we can mitigate a portion of the noncontrollable factors by continuing to grow our marketshare. We will also continue to manage our cost structure and rationally deploy capital based on customer demand.

Finally, I remain positive about long-term prospect for the home building industry and our Company. I believe we have the right plan and the right people in place to not only effectively manage through this downcycle, but also quickly take advantage of opportunities when market conditions improve.

I will now turn the call over to the operator for Q&A.

(OPERATOR INSTRUCTIONS). Michael Rehaut, JPMorgan.

This is Jen Consoli on the line for Mike. My question is around if you could provide any type of update for us on your progress with mothballing on any facilities and if you've made any decisions as far as exiting markets? And on the last conference call you mentioned perhaps in the second or third quarter that would be a possibility.

This is Kevin O'Meara. We did not mothball any facilities during the first quarter and currently have no plans to do so although we continue to monitor it on a regular basis.

Okay, great. And I was also hoping you'd talk a little bit more about your installation business. I know you had plans to grow that business organically and you mentioned that offsetting some of the loss or the reduction in sales in the other category. If you could just provide a little more color there and what your goals are for that business?

We are continuing to see growth in the install business going forward and we will continue to do that. The demand for that is very strong and we continue to meet the demand and try to create additional demand as builders look for different ways to build houses more economically.

Great. Thanks.

Nitin Dahiya, Lehman Brothers.

(inaudible) question first. What was the stock comp for the first quarter? I missed it, sorry.

It was a total of $1.6 million for the first quarter. Last year was $0.6 million so we had an incremental amount of $1 million.

Your share gains were pretty solid. What particular geographic or product markets where you think you gained share or was it pretty spread out?

It was fairly broad-based. If you look across our markets we gained share, we estimate the majority of our markets, only two or three that did not. We've been gaining share by expanding our multifamily sales as well as just adding new accounts. We are freeing up our salespeople to go out and prospect and to grow the business and that's being very effective.

So it was pretty much all across the board?

It was broad-based.

On the (inaudible), Charles, we certainly are getting the advantage of -- we believe we're a low-cost operator in the market. We operate more efficiently. Our higher service levels are putting us in very good stead to add new customers during this period of time, maintaining our current base.

Just on that, are you seeing some of your competitors kind of -- or especially the smaller guys running into problems just because of lower volumes? And just leading from that, do you think that any acquisition opportunity is out there?

The answer to both questions is yes. We are seeing some of the smaller competitors that don't have the asset base and the capabilities that we have. And yes, we do think there will be acquisition opportunities available in the coming months and quarters.

When you talk about acquisition opportunities, my sense would be that you will be looking at some of the bigger guys rather than the very small ones who you would rather just kind of fade away?

I don't know that we would characterize that. We are prepared to look at potential acquisitions of all different sizes. Our experience in history has been that businesses are pretty resilient and if you are trying to rely on somebody to go out of business, you tend to wait an extended period of time.

Fair enough. And Charles, in your update with respect to the floaters? You still hope to let them be out there?

At this point, we have not -- we are leaving them as is. We have not made any determination to try and to prepay our calls at the floating-rate notes.

Nishu Sood, Deutsche Bank.

First question, you mentioned in your commentary and in your press release about experiencing greater competitive pressures. I was wondering if you could just describe that a bit further. For example, which competitors are you seeing that from? Your larger competitors or perhaps your smaller mom-and-pop shops? And what types of tactics are you seeing that might have an effect on your margins going forward?

I think it's really pretty broad-based in terms of the aggressiveness of the builder seeking cost reductions. And what's going on is that you've got builders of all sizes who, 18 months ago, were very focused just on getting houses completed; where now, with a little bit of additional time, they have the opportunity to shop more aggressively and to push a little more aggressively.

One of the things that had set us apart historically is that our customer service tends to be the best in the marketplace. That really makes a difference when people are busy. The service standard, there's a big difference between us and the competitors when business is busy and everybody is busy. Where our competitors become not quite so busy, they have the ability to bring their service levels up; not quite to where we are, but nevertheless, the gap isn't quite as broad. And so that drives some of it as well. So I think it's across the board. I wouldn't point to any particular customer or any particular market or size of customer in particular.

I guess you describe it as competitive pressure. So is it more the case that it's pressure from your customers or pressure from your competitors, let's say in terms of irrational pricing, let's say?

It's both. I mean, the builders are being very aggressive in what they're asking for and from time to time in certain markets, you will see competitors behaving very aggressively as well.

And next question, I just wanted to ask about your SG&A. I know it was down, Charles, I think you said, excluding the stock compensation expenses, maybe down about 14% or so. But if you look at it on a sequential basis, it was only down about $2 million. So I was wondering if you could talk about -- I know some of that was probably due to the surprising fall in your sales, but what can we expect in that in terms of that figure going forward here through the rest of the year?

Well, in terms -- answering your last question, we have always estimated our SG&A's about 50% variable, 50% fixed. I think if you look for the first quarter we did slightly better than that from a variable standpoint. At the beginning of the quarter, we were truly expecting a start rate slightly higher than we experienced, so we held back on some job reductions in January until mid-February to get better visibility into the quarter. At that point, we began to pull back our headcount, reduce it, improve our sales per FTE.

So we had some reductions in place at the end of the quarter we didn't get the full benefit of in January and February, and that was intentional as we wanted to get some better visibility going into a normally heavier selling season, and we wanted to carry a little bit of excess. We did adjust for that in March. The headcount reductions we put in place during the quarter, the majority of them done in February and March, annualize out to a savings of about $15 million. So I think we did react. We actually responded better than what we'd normally expect in terms of the 50/50 mix and we will look to make those reductions going forward as we right size our operating structure based upon where we see housing starts going.

That's very helpful. And then just finally, in your commentary, you mentioned how the lag between starts or permits and completions that we saw affected your different product categories differently. Can you just run through that again and then maybe talk about how you would expect that trend to play out as we go forward here?

It just gets into the sequencing of how a home is built. Your beginning structural products are usually months one or two of the start and then you get toward the end products, such as many of your millwork products could month four or five. So as your housing starts continue to trail off as we've seen in our markets, your beginning products are going to falloff sooner rather than your finish-out products and then the reverse would be true as the conditions improve.

Okay, so that's why, for example, you were citing that millwork probably fell less than let's say lumber and prefab.

Yes.

Okay, got it. Thanks a lot.

July Johnson, Piper Jaffray.

I just have one follow-up. Thanks for taking my question. Looking at the other and in style segment, I was just wondering if you could give us a little bit of color as to improvements relative to the other categories performance is a result of extended service offerings or if it's more business with existing homebuilders?

Both. It's increasing builder demand for install services.

Keith Hughes, SunTrust.

I had two questions. In regards to the question from the previous caller, geographically, on the install products, are there certain geographies that you see that are ramping up versus others or is it across the southeast?

It's across the southeast. Typically you will see it more in the larger markets than in the smaller markets, but within that context, it's pretty uniform across the geographies.

If you look at the geography, which part of your market is the most advanced on install service from a company like yourself? In terms of builder acceptance to that type of service?

It tends to be the larger builders that are more inclined to buy in that fashion than the smaller builders.

I've heard North Carolina is [an area where it's used]. Is there a particular state?

Not really. I can't say that there's one state in particular where there's more demand than another. Other than I think you see less of it in Texas, for instance, than you might in other places, but throughout our footprint, I think it's fairly universal.

And finally, you had talked about acquisitions earlier. Are you still looking for deals within the footprint we've always known you to be in?

Yes.

Dan Leben, Robert W. Baird.

Could you talk about the sales from the top builders? [That's a site] you guys have given out in the past.

I don't have that in front of me, Dan. If you call me, I will be able to provide it. I just don't have that in front of me at this point.

Could you guys just talk a little bit -- Keith was mentioning some of the geographies in relation to the other services, but just could you talk about the permits level and the activity levels you're seeing; specifically talking about Florida market that everybody knows has been tough relative to some of the things going on in the Carolinas and then also what you've seen in Texas and some of the larger markets there?

If you look at Florida, Dan, it continues to go down sequential -- year-over-year it's obviously down an appreciable amount, close to 60%; on a sequential quarter base, it's down about 16%. Florida continues to struggle and will be probably be a protracted recovery. If you look at the other big markets, North Carolina has actually held in fairly well. On a sequential quarter basis, starts were only down about .3%.

South Carolina still tends to do a little bit better than the overall national trend. Georgia has started to correct -- it's sort of a late corrector and it was down 14% on a sequential quarter basis. You can see some stabilization going on in Maryland, which is good for us. Their sequential quarter declines are starting to stabilize.

New Jersey seems like it was truly affected by weather during the first quarter so it's hard to really ascertain. Really not a lot of strength in Ohio. Tennessee continues to be pretty strong and it appears like Texas could be a late corrector; on a sequential quarter basis they were down about 15% in terms of starts.

So North Carolina, in summary, is holding in well. The Maryland market seems to be stabilizing. Florida, which is a fairly big market for us is not stabilized at this point, and Texas seems to be sort of a late corrector.

Okay, great. And could you guys talk just a little bit about what you are seeing so far in terms of the spring selling season that everyone likes to talk about? Obviously you have taken the guidance out to things being rough throughout the whole year. Just, how bad is it? Are we just flattening out from what we saw over the winter or is this spring another step down that the builders weren't expecting?

Well, when you talk about the spring selling season from the builder's context, the thing that you have to understand is that it will be several months before we would see that. Once they sign somebody up in one of their models, usually their internal processes means we wouldn't see a release for anywhere between three to six weeks depending upon the builder, and then kind of catch up from there. So we're really probably not in the best position in terms of how houses are built to really comment on what the builders are seeing in their spring selling season. Obviously, we read the same things that you guys read and are getting invitations from the builders. We also look at permits and those kinds of things, and so that's our conclusion.

We do think that we are going to see some seasonality in terms of our business improving in the second and third quarter consistent with just normal seasonal patterns. I don't know that that says anything on a cyclical basis, but we do anticipate kind of the normal seasonal patterns that we've seen in years past.

Steve Fisher, UBS.

Good morning or good afternoon, actually. Are you still seeing some of the benefit in procurement dynamics in your lumber gross margins, where I guess you're buying for less than what you have the lumber contracted to sell for? Are those contract prices kind of matched up at this point?

I think at this juncture it's pretty well matching up. A lot of the windfall I would say that was there in the previous year has pretty well gone away. So I would say that there's very little there now, Steven.

And then, could you then just comment on again, what is supporting the gross margin in the lumber area?

Well, for the most part, it's returning more closely to what we have historically seen in that area, so I don't think that there's anything usually high margins being experienced there at this point.

Do you have any severance costs in your SG&A numbers or are these positions that you're reducing not -- they don't cover severance?

We do have severance costs in there. It's not a tremendous amount, but there is severance costs in there.

And then you touched on it a little bit before, are you taking any further steps to reduce your fixed overhead?

The key way to manage that, Steve, would be to really focus on whether we're going to close locations, which Kevin previously addressed. We're not looking to at this point or to exit a market. The majority of fixed cost is going to be in your occupancy. It's going to be your rent. It's going to be your depreciation items like that which absent just closing or leaving, exiting a market, you can't really control.

So what we've really been focused on where we can is pulling back the variable costs. As we've talked about, payroll is one of the biggest items when you look at our fleet pulling back our various fuel costs, handling costs and so forth. But in terms of the overall fixed capacity, we are content that to carry it at this point, we feel it positions us for long-term growth as the market recovers. It will allow us to ramp up quickly. We don't want to be shortsighted and start pulling back some of our capacity in order to improve short-term performance. We want to maintain the capacity, so when we do see improvement in the markets, we're able to respond quickly.

[John Holmes, Orks Capital Market].

With respect to the term loan, I would have expected a free cash flow suite paydown. Is that still to come or you're not required to make that for some reason?

Under the test, we were not required to make an excess cash flow payment this year.

Jim Wilson, JMP Securities.

Just wondering -- most of my questions answered, but was wondering, as it relates to -- how you're working with the big builders, are you -- I know obviously there's the cost pressure is going on throughout the entire market, but are you finding luck with trading off lower pricing and lower costs for more business, either within existing markets or adding new markets or things of that nature, could you kind of describe how it's progressing with them?

Yes, and we've been doing that for the last six to nine months. It tends to be less across markets than it is with either in an existing market, getting more subdivisions or selling more products; where historically maybe we didn't sell the windows and doors, but we have sold lumber or lumber components and trading some cost concessions in exchange for deepening the product line that they purchased from us.

And just one other question, Charles, as it relates to margin effect, [there are] markets obviously going to have the biggest impact on all your segments, but is there anything in the term margins of the different types of products you sell that might have a positive or negative influence as we look forward?

At this juncture, I can't really think of anything. Obviously commodity prices continue to be low. There is a potential there could be some improvement the latter part of the year, but we're not seeing it nor counting on that at this point.

[Rick Murray, Hobbit Capital].

Just curious, in light of Lennar's announcement not too long ago in terms of demanding concessions from a lot of their suppliers and subcontractors, I was curious if you had seen other builders follow suit and going so far as to be aggressive enough to demand price reductions on already completed work?

We have not experienced that.

And you haven't seen other builders begin to come out and broadly seat concessions even more aggressively than they have been?

That's been going on for the last six to nine months just generally in terms of forward-looking business. We have not had anybody do what Lennar did in terms of asking for concessions on some business that had already been completed.

Mike Peasley, Priority Capital.

Is there any one product within your installed services group that is -- makes up a bigger component, whether it be windows or insulation or cabinets?

Components is the -- our crosses and panels are the largest piece of that group and then I would say it's equally balanced between the window install and the exterior doors, interior doors and [tri-mount]; which insulation is also a large product for us in this category.

With trustles, trusses and panels, would that be 40%, 50% of the install business?

I don't have the exact number, but it wouldn't be that high, no. It's a broad base of products that we install.

Are they all your products or not?

Yes, and I think that's one of the things that really differentiates us. We will install only products that we distribute or manufacture ourselves. We will not install someone else's products.

Excellent. Thanks very much.

Jack Kasprzak, BB&T Capital Markets.

Actually it's Paul Betz. Most of my questions have been answered, but I just wanted a clarification. Did I hear you say the tax rate for the year would be about 35%?

That is correct.

Okay, great. Thank you very much.

(OPERATOR INSTRUCTIONS). Peter Brimm, First Q Capital.

I just wanted to ask a question, if you could comment a little bit on how the industry is sorting out what with [Billy Mitchell's corporate] bid there and with Home Depot Supply maybe looking to sell, you guys have any sort of color on how you think that might impact your market and any plans you have around that end?

No. We really don't. I didn't understand or catch your comment at the first part as it related to Building Materials Holding Corp. I'm not sure what you were referring to there.

It's not important. I'm just wondering how you guys view that whole marketplace developing.

The industry has been going through a consolidation really for the past 10 years and that's where we got our start, was as one of the consolidators. We think that's going to continue and acquisitions are going to be an important part of how we grow our Company and increase shareholder value. We think that will continue for an extended period of time. I don't know if that's going to mean something different in terms of larger versus smaller companies that become available for sale, but that is going to be something that happens going forward.

The thing about it is even in something like Home Depot Supply, the vast majority of the people at the Company, irrespective of who owns it, will be there before the sale, will be there after the sale. So the people that we're competing with today will be the same people that we're competing with the day that the sale closes.

Now obviously, different owners have different objectives, and you may see slight changes in tactics from time to time, but our experience has been when a competitor sells in a given market, there's not a dramatic difference in terms of how they compete.

At this time there appear to be no more questions. Mr. Sherman, I'll turn the call back to you for closing remarks.

Thank you. And thank you for joining us today. If you have any further questions, please feel free to contact Charles Horn.

This concludes the Builders FirstSource conference call. You may now disconnect.