Builders FirstSource Inc (BLDR) 2010 Q1 法說會逐字稿

Good morning and welcome to the Builders FirstSource first-quarter 2010 earnings conference call. Your host for today's call is Mr. 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. As a reminder, this conference call is being recorded today, April 23, 2010.

The Company 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 our 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 conference over to Mr. Floyd Sherman. Please go ahead.

Thank you and good morning. Welcome to our first-quarter 2010 earnings call. Joining me today from our management team is Chad Crow, Senior Vice President and Chief Financial Officer.

I will start with a recap of the first quarter, and then I will turn the call over to Chad, who will discuss the first-quarter financial results in more detail. After my closing comments regarding our outlook, we will take your questions.

For the quarter, we saw a continued improvement in the housing starts as actual US single-family housing starts increased to 114,300, up 46% from the same quarter last year. The national seasonally adjusted annual rate for single-family housing starts at the end of the quarter was 531,000, up 47.1% from the annualized rate of 361,000 one year ago.

However, consistent with the latter half of 2009 we continued to see actual US single-family units under construction decline. This indicates that the number of homes in the construction pipeline continues to decrease. For the current quarter, units under construction in the US declined 16.8% compared to the first-quarter 2009.

The annualized rate for units under construction was down 12.1% to 305,000, compared to the annualized rate of 347,000 one year ago.

Quarter-over-quarter as well as on an annualized rate, we saw the same downward trend with single-family units completed. However, when comparing March 2010 to February 2010, units under construction and homes completed are up, indicating a general increase in construction activity on a sequential month basis. These trends are consistent on both the national level and for the South Region as defined by the US Census Bureau, which encompasses our entire geographic footprint.

Our sales in the current quarter were up slightly, but we experienced an estimated 48% increase in commodity prices quarter-over-quarter. While commodity prices were up dramatically, fixed pricing agreements with our customers, which range from 30, 60, and 90 days, prevented us from passing along a substantial portion of these price increases to our customers.

As a result of this unprecedented run-up in commodity price during the quarter, combined with fixed pricing agreements with our customers, our gross margin fell to 18.2%, down from 21% in the first quarter of 2009. This run-up in commodity pricing has continued into April, but we believe our current inventory levels should help mitigate some of the pricing pressures in the second quarter.

While higher commodity prices are good for the long-term health of our Company, rapid increases which we are currently experiencing place added pressure on our gross margins. I would like to emphasize that while our overall sales volume was relatively flat quarter-over-quarter, we saw fairly significant increases in volume in our commodity and manufactured products category, which increased an estimated 10% and 8%, respectively.

These increases in volume are consistent with an increase in the number of homes being started, as these product categories are generally sold at the beginning of the new home construction process.

I will now turn the call over to Chad, who will review the first-quarter financial results in more detail.

Thank you, Floyd. Good morning, everyone. Looking at our first-quarter results, we reported sales of $161.4 million, compared to $159.6 million a year ago, an increase of $1.8 million or 1.1%.

Breaking down our sales by product category, prefabricated components increased $3 million or 10.4% from the first quarter of 2009. Windows and doors were down 7.4%. Lumber and lumber sheet goods increased 14% to $44.4 million. And our millwork category was up 7.9% to $17.8 million. Finally, other building products and services decreased 14.2% to $30.3 million.

From a sales mix perspective, commodity and manufactured products were a combined 47.3% of total sales, up from 42.5% of sales in Q1 2009, primarily due to an increase in volume and, to a lesser degree, price inflation. Our other product categories were either flat or down as a percentage of total sales.

Our gross margin percentage was 18.2%, down from 21%, a 2.8 percentage point decline. Gross margins declined approximately 3 percentage points due to price, which was offset slightly by an increase in sales volume and changes in sales mix.

Selling, general, and administrative expenses decreased $2.6 million or 5% for the first quarter of 2010. As a percentage of sales, SG&A expense decreased from 32.6% in 2009 to 30.6% in 2010.

Salaries and benefit expense excluding severance and stock comp expense was $28.2 million, down $200,000 from the first quarter of 2009. Within this category, workers compensation and group health expense increased a combined $1.5 million or almost 1% of sales due to less favorable trends in claims compared to that of a year ago. Office G&A expense fell $700,000 or 12.5%. Occupancy expenses were down $600,000 or 11.4%. And delivery expense increased $200,000 or 2.1% due primarily to increased fuel costs.

Our writeoffs and recoveries expense decreased $900,000 to $700,000 from the first quarter of 2009. Interest expense was $11.3 million in the current quarter, an increase of $3.8 million over the prior year due to the writeoff of $1.6 million of unamortized debt issue costs related to long-term debt repaid during the quarter, and $2.5 million of costs related to our recapitalization transaction.

Interest expense also increased by $800,000 due to the fair value adjustments on our interest rate swaps. These increases were partially offset by a writeoff of $1.2 million and debt issue costs related to the capacity reduction of our revolving credit facility from $350 million to $250 million in the first quarter of 2009.

We recorded an income tax benefit of $100,000 during the quarter compared to $2.1 million of expense in the first quarter 2009. We recorded an after-tax noncash valuation allowance of $11.6 million and $12.2 million in 2010 and 2009, respectively, related to our net deferred tax assets. Absent this valuation allowance, our tax benefit rate would have been 37.6% and 38% in 2010 and 2009, respectively.

Our loss from continuing operations was $31.2 million or a $0.38 loss per diluted share, compared to $28.6 million or a $0.73 loss per diluted share. Excluding the valuation allowance and the write off of debt issue costs, our loss from continuing operations per diluted share was $0.21 and $0.40 for 2010 and 2009, respectively.

Our loss from discontinued operations for the first quarter of 2010 was $200,000 or $0.00 per diluted share, compared to $2 million or a $0.05 loss per diluted share for the first quarter of 2009. Adjusted EBITDA was a loss of $15.3 million compared to a loss of $12.5 million in Q1 2009.

In January 2010 we announced the completion of our rights offering and debt exchange. The closing of these transactions reduced our long-term debt by $130 million and extended the maturity of $139.7 million of our remaining debt to 2016. The rights offering also provided the Company approximately $65 million in net proceeds to be used for general corporate purposes.

We ended the quarter with over $124.8 million in cash, which does not include the $33.8 million income tax refund we received in April. Available liquidity was $131.2 million, as we had $6.4 million of net borrowing availability at quarter-end under our revolver.

Net cash used for the current quarter, excluding the net proceeds from our recently closed rights offering, was $27.2 million, which was less than we had forecasted. Of the $27.2 million of cash used, $4.4 million was due to an increase in working capital, the result of improved sales in March, combined with inventory buys to cover our fixed pricing arrangements. Additionally, $1.9 million related to capital expenditures which were related to lease buyouts on rolling stock.

The remaining $20.9 million of cash used to fund general operations was impacted by rapidly increasing commodity prices, which reduced our gross margin by an estimated $4 million to $5 million during the quarter.

From a working capital perspective our Accounts Receivable days decreased to 36.1 days from the current quarter, compared to 42.1 days last year. Inventory turns improved to 9.1 times from 7.7 times the same quarter last year. Additionally, Accounts Payable days increased to 34.4 days, up from the 27.3 days for the first quarter of last year. These improvements helped to lower our cash conversion days to 41.9 days in the current quarter, down from 61.9 days for the same time last year.

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

Thank you, Chad. Although housing starts have somewhat stabilized, we continue to experience intense pricing pressure from competition; and rapidly rising commodity prices will continue to present challenges for us in the second quarter. We also do not yet know the future impact on our sales, if any, that may result from the upcoming expiration of the federal tax credit for first-time homebuyers.

However, while industry conditions remain difficult, our improved liquidity position coupled with our $33.8 million federal income tax refund received in April currently has us well positioned to take advantage of a housing recovery.

Finally, I would like to thank all of our employees for their hard work and the sacrifices they have made during these challenging times. I believe we have the strongest team in the industry, and I am very proud to be a part of the BFS team. I will now turn the call over to the operator for Q&A.

(Operator Instructions) Nishu Sood, Deutsche Bank.

It's actually Rob Hansen on for Nishu. Hey, guys. How are you doing?

I just wanted to touch very quickly on your margins, in terms of the gross margin when you guys think you will get some sort of benefit from commodities going forward?

Well, I can tell you even subsequent to quarter-end, commodity prices have continued to ramp up. So even though we were able to reset pricing at the end of the first quarter, which will certainly help, to some degree we are still chasing escalating commodity prices.

So once those settle out at hopefully a higher level, we're definitely going to be able to take advantage of it. But we're still experiencing some pressure at the beginning of this quarter.

Okay, so like a one-quarter lag basically between when they level out and when you guys would experience a benefit.

Maybe slightly less than that. We're able to reset some pricing on 30- and 60-day basis, but definitely by a three-month lag.

We are starting to see, as you know Chad, on our tracking, on a day-to-day tracking, we're starting to see some of the improvements coming through. Although very slow, it is starting to show up now in the margins.

Yes.

Okay, and last quarter you mentioned the phenomenon of the delay between the starts and the units being under construction. Has that -- did that continue in the late part of 1Q and then into 2Q?

If you look at it compared -- March compared to February, we are starting to see the pipeline is beginning to show the trend of under construction completions versus the starts. It looks like the starts are starting to move through the process.

If you look at it March compared to December, it still shows that we are on a decreasing trend. But the reversal in March from February I think is an indicator. I think maybe this is bottoming out and the level of activity is going to be increasing now in the units under construction moving into the completions.

All right. Thanks, guys.

Seth Yeager, Jefferies & Company.

Morning, guys. Just a couple of quick questions. As far as the commodity price increases, what percentage of the 30, 60, 90 days -- can you break that out as far as how those are contracted? Just to get a sense as to the percentage of lag that you are getting right now.

If you look at our commodity business and strictly from a commodity standpoint, almost 64% of our commodity pricing is on a 90 day; and then the rest breaks down about equally between 60 and 30.

If you look at it on our total overall business, all products considered, it runs about 40% on the 90-day forward pricing.

Okay, thanks. That's very helpful. As far as the increases that you have been able to announce, how much of the increase in material costs have you been able to recover? And how much pushback are you getting from customers?

Getting a hell of a lot of pushback from customers, I can tell you that. Builders are just now really starting to get the sticker shock. Most of the builders have been insulated during that first quarter from the run-up in prices that started somewhere around mid January.

As Chad said, on a combined basis -- panel and stock and random length lumber -- about a 48% increase; and it is still continuing unabated through the first several weeks of April.

So the builders are really pushing hard to try to minimize that increase. We obviously are pushing hard to get it.

As far as seeing -- being able to pass it on, when you are starting to do your forward pricing, you are not only looking at your cost of a product on hand and on order, but you are trying to anticipate what the market might be 90 days down the road. When you go into a competitive pricing situation, you are dealing with other competitors who may have a totally different view of what the forward pricing expectation might be. And that's where the real negotiation begins to take place between the builder and the various people competing for his business.

As of right now, our increases are not showing through. We obviously have reset our prices to hopefully recoup the run-up in the material cost and get our anticipated standard margins on the sale of those products. I think only the next several months we obviously know whether we are successful in that.

I am seeing signs taking place now that we are starting to move the pricing, the price points, up on materials that we measure -- the key indicators of our business -- on an ongoing basis.

So I think our people will get us the best prices that can be had in the industry, but it's going to be a very, very tough negotiation. Typically you also give your customers at the time you reset a price -- our standard is that orders that were in the house and that ship within 15 days after the set of a new price will be honored at the old price. So you always have a little bit of carryover.

Then anything that wasn't shipped we have to kick back to the customer and then re-price at the new pricing. And that business may or may not be captured by us. It may then, at that point, go over to a competitor who has given a better forward price.

But right now, our people are doing a very good job of getting the new prices into place.

So it's fair to say that you guys are focused more so on the pricing than market share?

Yes, as of right now I can tell you we are very, very focused on pricing.

Okay, thanks. I guess just one quick follow-up. As far as your cash this year, I think last time around the cash burn expected for the full year was somewhere around $65 million. Given the increase in commodities and -- if you could give us an idea on your interest rate swaps and what you have to pay on that and CapEx. Can you give us an idea of where cash may be at year-end given your current outlook?

Well, we are not ready to come up to $60 million to $65 million for the year, yet. Now we may, if prices stay up, we obviously may see a higher buildup in working capital than we had originally forecasted. But in the long term, that is a good problem to have. And that will ultimately flow through the business. But right now we're not ready to change that forecast.

As far as our interest rate swaps, we are estimating that is probably going to cost us about $4 million in cash this year. But that is part of the $60 million to $65 million we have already given.

I think you had another piece to your question. What was it?

CapEx.

The CapEx?

That would be the CapEx.

CapEx, we're still thinking that's going to be on a net basis around $8 million. Again, that is primarily to buy out rolling stock.

Okay. I will hop in queue. Thank you.

Brad Bryan, Imperial Capital.

Okay. Hello, gentlemen. Just can you quickly comment to what extent your customers -- or, sorry, your competitors are showing pricing discipline in terms of passing on the higher commodity costs?

That's really a very mixed bag. They all are passing on price increases to some degree. We have also seen some instances where our competitors have put in and have bid some very low prices and now either they don't have the inventory to support the business or they don't want to support the business because of the replacement cost that's involved and the effect that's going to have on that company for that period of time. But they are honoring a commitment, and they are backing away from it.

I would say the market is still characterized by some very undisciplined pricing. But I think the realities that everyone faces will soon hit them. And I think what we will begin to see is probably a much more disciplined approach to pricing that will be taking place as we move on into the quarter.

Okay. Thank you. Second, assuming that commodity prices were to remain at their current levels, can you just qualitatively comment how the second-quarter gross margin might be impacted relative to the first quarter?

Could be about the same, maybe slightly better based on inventory buys we have been able to make. But it is still going to be a lot of pressure on it, like we said.

A lot of it depends strictly on will we continue to see a continual rise in the commodities throughout the quarter. If we get a softening, if there is a pullback in pricing, then very definitely our margins will reflect that.

Okay. Thank you. That completes my questions.

Philip Volpicelli, Cantor Fitzgerald.

Good morning. Did weather play a role at all in the first quarter, or was that just something that -- it was more the margin pressure?

We had -- it was a brutal first two months. The snow impact, a tremendous impact on our business all the way from the northeast Maryland operations down to the -- down as far as Charlotte and Atlanta. We even had -- snow had a major effect here in the DFW market.

And if it wasn't snow, we got a tremendous amount of rain in the Florida markets and Alabama and Georgia markets. So, yes, very definitely a major impact in January, February.

March, our activity -- we showed a really nice increase of business in March. How much of that was a recovery of January and February? That is really hard to measure. But I know a part of the increase we saw -- and it was a double-digit increase in March. This same pace, in fact our April pace is starting off at this point, is a little bit better than what we experienced in March.

So I would say it is reflecting a higher rate of building activity, more business moving into the construction pipeline. So, you know, still unknown what, as we said, the effect of the termination of the tax incentive will have on the business.

But right now certainly the results that we are showing, I think we're past that January, February bad weather impact.

Got you. I believe it was about a year ago you guys laid out -- I believe you guys laid out that at around 400,000 starts you would lose about $50 million in EBITDA; at about 500,000 starts about $30 million loss; and about 600,000 starts you would be breakeven EBITDA.

Are you guys comfortable with those guidances? Or has that changed at all?

No, we still feel we can be near breakeven EBITDA at 600,000 to 650,000 single-family.

With normalized --

Assuming normalized margins. Obviously, with the rise in commodity we have seen recently those numbers would be different. But that run-up can't go on forever.

Got you. So if we're assuming 20%, roughly gross margin, those numbers hold?

That's correct.

Great. Then I just missed the revolver availability. I just missed it when you were in your comments.

$6.4 million at the end of the quarter.

Great. Thank you very much.

(Operator Instructions) Bob Robotti, Robotti & Company.

Hi, how are you? Could you talk a little bit about market share? Do you have a sense as to what might have happened in the first quarter?

Because I think you also made some reference in maybe one or two markets you may have picked up share because of the commodity price increase; and some of the smaller, I guess less well-capitalized competitors had issues with being able to purchase new lumber.

But can you give us a picture and what do you think, if anything, happened in market share in the quarter?

You know, the way I looked at it, Bob, for the quarter, I tried to adjust our sales for any commodity inflation impact. I looked at it on a per unit under construction basis in the South Region. And when you look at it that way, it would show our sales volume being up around 8% to 10%.

Could you go to that -- you know, in the sales volume being up 8% to 10%, how does that jive with the fact that you said the houses under construction are down? And of course in the South markets that is your core, it was down also. So wouldn't 8% to 10% --?

That would indicate that we are gaining market share.

Right; I'm saying our sales volume was up on a per unit under construction basis. Obviously in part of that calculation is the decrease of the units under construction year-over-year.

Okay. Could you go through the margin compression in the quarter? Because I guess I'm a little bit confused.

Because of course you guys are FIFO inventory people, right? So you are delivering inventories that are already at lower costs. So conceptually I have a little bit of a tough time figuring out if replacement is going up and you are buying inventory and you are delivering, and the delivering is fixed price but it's fixed price based on what effectively would relate to a margin on the inventory you had in place -- how does that compress the margin in the quarter?

I guess maybe because, what do you have, 9% turns? So therefore, what is that, 40 days? So therefore you turned inventory twice in the quarter. So is it effectively you are delivering goods --?

Yes, but wait a minute. That's true on an overall basis, but we turn our commodity inventory much faster than that.

At the end of the year we were still working on getting the rights offering and the recap done. So we were really cautious about how much we spent on inventory at that time. So we were also a little behind on inventory levels at that point.

And when we reset and we set our pricing back at the end of the December of 2009, and that is when the majority of your 90-day forwards were set, the market at that point was relatively flat. It had been almost unchanged if you take it from the beginning of August through the end of December; it was up less than 2%.

So while we anticipated and we thought that we would be seeing some increases, we really didn't have the cash that we could afford to gamble with and make a large inventory buy to protect ourselves. But I can tell you I don't think there was anyone who predicted that there would be the type of run-up that we saw on the commodities between that midpoint of January and the end of March, which was on an overall basis almost 48%.

So that left us really exposed. While we looked at and we based our pricing on hand and on order, which you have to do when you are doing your pricing; plus you have a factor that you try to anticipate where the market is.

But while you have some inventory to cover and you had some materials that was on order that you knew the price and what that would be, when we started at the end of January, midpoint of February, we were having to bring in replacement inventory that greatly exceeded what we had anticipated the cost would be.

From that point right on through the end of March, we were underwater on our pricing.

Thanks. In the five segments where you actually break down sales -- windows and doors and other building products, both of those were -- the revenue numbers were down in the quarter. Could you say, were those volume reductions? And in certain cases like in other building supplies, might it be discontinuance of certain product offerings?

No, the main reason for the decline in other buildings products and services is in our installed sales. There was a -- you probably are well aware -- a major falloff in the multifamily construction market.

Our installed services are heavily oriented to the large multifamily projects where we do complete turnkey installation. With the falloff in that, it is not just your framing or structural members that we sell, but this is where a large percentage of our windows, doors, interior trim goes.

So the two areas that were affected were the other building products and services, that installed services fell off, and windows and doors which are heavily oriented towards that side of the business.

The rest of our lumber sheet goods, prefab components, and millwork all had a dollar increase; and the millwork was pretty much all straight volume increase.

Thanks. One last question, and that is -- on the combination of better receivable collections, better inventory turns, and pushing out the payable days, your cash conversion went from 61.9 days down to 41.9 days. Could you -- is either one of those a sustainable number? That's obviously a big improvement.

Or are there temporary things going on? What is the right number to maybe anticipate on a go-forward basis?

I would say AR days is probably sustainable. It may creep up a day or so, but I think that should be in the ballpark.

As far as AP days go, we did see a significant increase in that. A lot of that is due to the increase in commodity prices. We have some pretty good terms with our commodity vendors as compared to some of our other vendors.

But it's also a big falloff in installed (multiple speakers) pay on a two, every two --

The reduction in our installed labor, in our installed services that Floyd was just talking about, those folks we use to help with installation usually pay on a two-week term. So it was a combination of increased commodity buys versus a falloff on our installation services.

So I don't think the AP days of 34 is probably sustainable. I think overall for the year it would probably be closer to 30 days.

Bob, our working capital as a percentage of sales for the quarter was 8.8%. That is my personal standard is -- will fall, depending on time of the year, 9% to 9.5% is where you would really like it to be. We have at times been slightly under that 8.8%. This was one of the best performances that we've had.

So I would say it would be hard to maintain that. Typically you would not like to see it go over 10%. Now, our percentage of working capital is a hell of a lot lower than anybody else that we see in the industry. Typically you will see that number run anywhere from 14% to the low 20s%.

But we manage this part of our business really hard. But I don't know that we can keep it down there below the 9% on a go-forward basis.

You know, I actually have one last question. That is, obviously with the cash and the debt situation there is a significant cost to carry the cash on the balance sheet. And obviously, you and the Board are fully aware of that and you are incurring that cost because you think there are opportunities.

Could you just give us some sense as to in the coming year what kind of opportunities and how active things might be and what you see for the potential employment of that cash and the dissipation of that negative carry you have got?

Well, you know, first, we are going to be guided very much by trying to get a handle -- the uncertainty of whether housing is really going to recover or not. I think we will know where the year will begin to -- what it will begin to look like by the end of June. And that's going to greatly affect the decisions that we may make regarding the use of our cash and whether we put it into it expansion of working capital, expansion of maybe some CapEx projects that are very good longer-term projects that we have bypassed here in the last couple of years.

If we really felt that housing still had another two to three years of the type of activity (technical difficulty) up to this point, obviously are going to be very concerned about really conserving your cash.

If we see and we feel confident that we are going to see an improving housing condition and that the commodity prices at least stabilize, I think we are going to be actively looking at acquiring other companies that this is the right time to do it and take advantage of the market before it really turns upward.

So, you know, that is the best answer I can give you.

Sounds good. Thank you.

It appears we have no further questions at this time. Mr. Sherman, I will turn the conference back over to you for closing remarks.

Okay. We really appreciate the support that you have continued to show for our Company. We appreciate your listening in on our conference call. If you have any further questions, don't hesitate to contact Chad Crow.

That concludes today's conference. Thank you for your participation.