Builders FirstSource Inc (BLDR) 2010 Q2 法說會逐字稿

Good morning, and welcome to the Builders FirstSource second quarter 2010 earnings conference call. Your host for today's call is Mr. Floyd Sherman, Chief Executive Officer. (Operator Instructions). The Company issued a press release after the market closed yesterday. If you don't have a copy, you can find one at 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 Mr. Floyd Sherman.

Thank you, and good morning. Welcome to our second quarter 2010 earnings call. Joining me today from our management team is Chad Crow, Senior Vice President and Chief Financial Officer. I'll start with a recap of the second quarter, and then I will turn the call over to Chad, who will discuss our second quarter financial results in more detail. After my closing comments regarding our outlook, we will take your questions.

For the quarter, our sales were $211.5 million, up 20.5% over sales of $175.5 million one year ago. Fueled by the Federal tax credit for first time homebuyers, the seasonally adjusted annual rate for US single family starts increased to 563,000 units as of April, but fell back to 454,000 as of June, down 4.6% from one year ago as the tax credit expired. For the current quarter, actual US single family housing starts were 142,000 units, up 14.8% from the same quarter last year. But the number of single family units under construction during the same time period fell 6.6%.

The South Region, as defined by the US Census Bureau, and which encompasses our entire geographic footprint, fared slightly better as actual single family housing starts were 72,000 units, up 18% from the second quarter of 2009, and single family units under construction were up 1.1% over the same period.

While we enjoyed improved building activity and increased sales during the quarter, extremely volatile commodity prices, coupled with intensely competitive pricing conditions, had a negative impact on gross margin. Commodity prices rose over 22% from the end of March through the end of April, and then fell sharply, decreasing 35% from the end of April through the end of June. This volatility in the commodity markets, combined with excess supply chasing a limited number of units under construction, contributed to our gross margins declining four percentage points compared to the same quarter of 2009.

From an operating expense perspective, we continued our focus on controlling costs, as selling, general and administrative expenses increased only 2.2% compared to an 11.2% increase in sales volume.

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

Thank you, Floyd. Good morning, everyone. We reported sales of $211.5 million compared to $175.5 million a year ago, an increase of $36 million or 20.5%. Breaking down our sales by product category, Prefabricated Components increased $6.1 million or 17.2% from the second quarter of 2009. Windows and Doors increased 8% to $46.4 million. Lumber and Lumber Sheet Goods increased 67.7% to $66.2 million. Our Millwork category increased $2.9 million or 15.6%, and other building products and services decreased 8% to $35.9 million.

From a sales mix perspective, Lumber and Lumber Sheet Goods increased from 22.5% of total sales in 2009 to 31.3% in 2010. We estimate that approximately 60% of the increase in this category was due to price, and 40% of the increase was due to volume. Our Other Building Products and Services category decreased from 22.3% of total sales to 16.9%. This category, which includes labor revenue on installed services, was negatively impacted by the continued slow down in multifamily construction. All other categories were fairly consistent from a sales mix perspective.

Our gross margin percentage was 18.3%, down from 22.3%, a 4.0 percentage point decline. Gross margins declined 4.8 percentage points due to price, which was partially offset by a 0.8 percentage point improvement in margin due to sales volume.

As you may recall, rapidly rising commodity prices in the first quarter of this year put intense pressure on our margins, as the run up in prices occurred just after we set prices with our customers for the quarter. Prices continued to rise as we entered the second quarter, creating the same scenario we faced in Q1. In addition, increased sales volumes in the month of March and April, generated by the expiring Federal tax credit, required us to replenish inventory during this rising market. When prices and demand fell in May and June, additional pressure was placed on our margins.

Turning to SG&A, our selling, general and administrative expenses increased $1.1 million or 2.2% for the second quarter of 2010. However, as a percentage of sales, SG&A expense decreased from 28.7% in 2009 to 24.3% in 2010. For the quarter, salaries and benefit expense, excluding stock comp expense, was $29.8 million or 14.1% of total sales, compared to $28.7 million or 16.4% of total sales in the second quarter of 2009.

Office G&A expense increased $400,000 from the second quarter of 2009, but decreased as a percentage of total sales down to 2.5% in 2010 from 2.8% in 2009. Occupancy expenses were down $600,000 or 11.1%, and delivery expense increased $500,000 or 4.6%, due primarily to increased fuel costs.

Our write offs and recoveries expense decreased to $400,000 in the second quarter of 2010, down from $1.1 million in 2009. Interest expense was $6.5 million in the current quarter, an increase of $400,000 over the second quarter of 2009, primarily due to higher interest rates during the quarter, partially offset by lower average debt balances.

We recorded an income tax benefit of $300,000 during the quarter compared to $100,000 of expense in the second quarter of 2009. We recorded an after tax noncash valuation allowance of $7.1 million and $6.6 million in 2010 and 2009, respectively, related to our net deferred tax assets. Absent this valuation allowance, our tax benefit rate would have been 38.5% and 35.2% in 2010 and 2009, respectively.

Loss from continuing operations was $18.9 million or a $0.20 loss per diluted share compared to $18.6 million or a $0.47 loss per diluted share for the second quarter of 2009. Excluding the valuation allowance, our loss from continuing operations per diluted share was $0.12 and $0.30 for 2010 and 2009, respectively. Our loss from discontinued operations for the second quarter of 2010 was $100,000 compared to $4.0 million or an $0.11 loss per diluted share for the second quarter of 2009. Adjusted EBITDA was a loss of $7.6 million compared to a loss of $5.6 million in the second quarter of 2009.

Our available cash at June 30 was approximately $125 million. Our total liquidity at quarter-end was over $141 million, as we had $16.6 million in borrowing availability under our revolver. Our cash balance at quarter-end was on forecast and our available liquidity slightly better than forecast.

Cash used for the quarter, excluding the $33.8 million Federal income tax refund we received in April of 2010, was $34 million. Of the $34 million of cash used, $15.1 million was due to an increase in working capital, $4.8 million related to capital expenditures, primarily associated with lease buy outs on rolling stock, and the remaining $14.1 million of cash used was to fund operating losses.

Our working capital management continues to be effective, as our accounts receivable days decreased to 34.5 days for the quarter compared to 39.1 days in the same quarter of last year. Inventory turns improved to 9.8 turns, up from 9.2 turns for the same quarter of 2009, and our accounts payable days remained flat quarter over quarter.

Our continued focus on our working capital management resulted in cash conversion days dropping to 41.1 days for the quarter, a 6.9 day improvement over the second quarter of 2009 and a slight decrease on a sequential quarter basis. Working capital expressed as a percentage of sales for the quarter was 8.8% compared to 9.6% one year ago.

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

Thank you, Chad. An extremely volatile commodity market during the quarter added to what was already one of the toughest housing markets in our nation's history. Through these challenging conditions, we remain very focused on prudently managing cash and positioning the Company to take advantage of a housing recovery. Our use of cash through June was consistent with forecasts, and we believe seasonal reductions in working capital will help reduce our use of cash over the remainder of the year.

However, it now appears building activity in the back half of 2010 may not be as strong as we had anticipated, which would result in our use of cash for fiscal 2010 being in the range of $70 million to $75 million, which is higher than the $60 million to $70 million we originally forecasted. There still appears to be a significant amount of uncertainty in the macroeconomic factors that drive our business. We will continue managing our business in the same conservative manner as we have over the past several years, and will do so until greater clarity returns to the home building sector.

These are very difficult times in our industry, and my sincere appreciation goes out to all of the Builders FirstSource employees who work day in and day out to help our Company combat these challenging conditions.

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

(Operator Instructions). Our first question is from Seth Yeager with Jefferies and Company. Please go ahead.

Hi, guys. Thanks for taking my questions.

Yes, good morning.

Morning. So you noted in your press release a significant drop off in June, in your commodity prices specifically. Can you give us a sense as to trends on volumes as well following the expiration?

I think just looking at housing starts and the fall off you have seen since April, I would say our sales volume has trended consistently with that fall off in starts.

All right. And then, as far as from a working capital perspective, just looking at the NAHB numbers, it looks as if lumber pricing has increased a little bit since quarter end. Are you guys seeing that, and have you announced any price increases so far?

Well, traditionally we set most of our pricing just prior to the beginning of the quarter, which we did just prior to the beginning of the third quarter, obviously. And yes, we have seen lumber prices -- they leveled off and are up slightly since year-end, but certainly not enough for us to have to go back to customers and renegotiate any pricing at this point.

All right. And then just one final question. Considering your current outlook and sort of a slightly accelerating cash burn, what is your view for your current runway as you see it if things, I guess, hypothetically remain status quo? And are you beginning to look at alternatives for funding if that does occur?

If we come in the cash burn range that we are forecasting, $70 million to $75 million, obviously you do the math on that, that puts our liquidity at year end somewhere in the neighborhood of $100 million to $110 million. If things don't get better in 2011, there are certainly other things we can do to conserve cash or generate cash. They're not necessarily things we want to do. Some of them could have long-term implications to the Company as far as its position to take advantage of a recovery when it comes.

We will certainly do things that we need to do for the survival of the Company, but everything remaining status quo, if things don't get better next year, our cash burn would be, I would guess, slightly better than it is this year, but we are really not in a position right now to try to forecast 2011.

Sure. I guess if I can have one quick follow-up, is there any noncore assets that you guys have sort of earmarked that you could potentially sell next year if need be?

No. We have -- the ones that we have are just, isn't enough to move the needle. So we have pretty much already made those moves. One of the big intangibles is going to be -- and right now is, are we able to pull the margins up? Will we see -- certainly the very volatile commodity market had very, very serious implications on our margin. If we start seeing a more normalized pattern to commodities, we can take that out of the equation.

The -- our working capital efficiency, I think that that certainly would anticipate that that will continue to be as good as what we are enjoying now. The -- as Chad said, there are other things that we can start doing and will do if it is required to reduce the cash demand on the business.

The -- one of the things that we are going to be watching very, very closely over the next six months is obviously, does housing begin to rebound? Do -- is there a loss of some of the capacity that exists right now in the market? If so, that can have some positive effects on our business. So we are not -- there certainly is not any panic mode here, and we feel very comfortable about what we can do through 2011 and into 2012, and certainly we will address any financing issues when it is time to do so. Right now, we don't see that that's necessary.

All right. Thanks for the color, appreciate it.

Our next question is from Nishu Sood with Deutsche Bank. Please go ahead.

Hi. This is actually Rob Hansen on for Nishu. I know you guys mentioned lease expense in terms of your CapEx. I just wanted to get a little bit more on the CapEx, what drove it higher this quarter, where the leases were, and kind of what -- I think you mentioned $2 million to $3 million in the back half of this year. What's driving that?

Yes, the majority of the CapEx for the entire year is due to lease buy outs we have on our fleet, and we have already notified the lessors that we will be buying back this equipment, and so it is just a matter of timing and where it falls and what quarter. The back half of the year will be $2 million to $3 million, and again, most of that is relating to the buy out of leased equipment fleet, trucks and forklifts.

Okay. And I guess in terms of a normalized run rate for that, next year?

I don't know that it you can call anything normal right now the way the market is. But next year we will have to make the call probably towards the end of this year. We also have leases coming up next year that we would have to consider whether we're going buy them out or not. We will make that decision at the end of the year whether to buy that equipment out or turn it back to the lessor.

If we buy it out, I think our total is somewhere between $7 million to $7.5 million, if we make the decision to do 100% buy out.

Right. Obviously, we are being very prudent on how we spend our cash, and are only doing things that are absolutely necessary. But I think Floyd is right. If we were to buy out all of the fleet next year, you would probably be looking at a CapEx number similar to 2010.

Okay. And then just in terms of lumber prices, I just wanted to try to get an idea of how quickly your customers and your competitors react to the falling lumber prices in the back -- towards the end of the quarter?

I'm not really sure I understand the question that you are asking. If you could maybe rephrase it?

Sure, sure. Just in terms of how quickly the lumber prices fell during the quarter, I just wanted to try to get an idea of how quickly your customers are pressuring you to lower price and some of what your competitors are doing as well.

Well, probably 65% of our business is done on 90 day forward pricing. Typically, that pricing occurs the last half month of a quarter end. Not all of it will fall there, but the majority of the pricing occurs then. Once your prices are set for the coming quarter, the -- we don't have any retrading on it. That has not been an issue at all with us. The rest of our pricing is 60 day forwards and 30 day forward pricing. The -- obviously, with 30 day forward pricing, you can continually move your prices up as the market moves up, or consequently, you can take the price back down. But we really don't have a problem with having to go back and retrade prices once they're set.

The issue that really hit us in this past quarter is that when these prices were set the last couple of weeks of March, while the market had moved up from the beginning of the year, they really started to accelerate mid April through mid May. And we found ourselves getting under water with the prices that we had quoted going into the second quarter.

We also, because of a really increased demand and a lot of builders were really accelerating in order to get the homes completed so that they would be able to turn them over and qualify for the tax advantage, that house had to be turned over by the end of June. And so our volumes were much heavier than was anticipated. That required us, as Chad said, to step in and buy on a market that had really overheated.

This same thing was happening with other customers, that we just hadn't really covered enough of the run up in demand, and so everybody was jumping into the market. Prices accelerated, that even pushed us further under water, and now the prices have collapsed back to where they were pretty much at the beginning of the year.

We have now done our pricing going into the third quarter. Right now, the commodity markets are behaving much more normally than is the case, and I think that we are not going to experience some of the same issues that we experienced in the second quarter.

All right. Thank you very much.

Your next question is from David Manthey with Robert W Baird. Please go ahead.

Yes, hi. Good morning. Floyd, I was wondering if you could talk about -- adding on to the last commentary there, if you could talk about your expectation for gross margin in Lumber and Lumber Sheet Goods next quarter? Are we going to be in the low single digits again until you can work through the higher priced inventory?

No. I think we will be better than that. We have already started to see a little bit of improvement in that category. I don't think we will be able to get back to what traditionally is the margin level in this category. But I do think we are seeing indications that as we are moving in now to the lower cost replacement inventory, margins are reflecting an upward trend.

The same margin issue affected us in our Component as well as it did in Lumber and Lumber Sheet Goods, because the lumber or panels -- the OSB panels are such a major part of the cost structure of roof trusses, floor trusses or wall panels. So we experienced the same type of issue on that product category, so I would also anticipate seeing an improving margin structure in that area of the business as well.

If you look at our performance in the second quarter, if we had gotten our normalized margin where we were a year ago, we would have been right at EBITDA breakeven for the quarter. And that, to me, I think, really showed that what we had forecasted and said we needed for a housing market to sustain breakeven EBITDA performance is certainly -- is pretty accurate, and we have done a lot of things to improve our business, and those things, I think, are really showing up. I think we have also anticipated better for the third quarter what our usage is going to be. If anything, we probably will be heavier in our inventory positions than what it is going to turn out requiring. But at the same time, it will give us much better protection for the margins on the sales that we have quoted.

It is still a brutal pricing environment out there. Certainly anyone who has homes that are going to fall and move into the under construction mode, they have -- the builders are doing a very, very good job in negotiating the best possible prices, and a lot of people are chasing whatever available work is out there.

I think we have done a good job of monitoring and taking jobs where it is the prudent thing to do. We did relax our pricing standards in the second quarter so that we could begin driving more volume through the operations, and getting better absorption on our fixed costs, and I think that has paid off. And we will continue, though, to monitor whatever work we are bidding on, and trying to make sure that we're covering and getting some recovery on fixed costs.

Okay. And then maybe if you could talk a little bit about SG&A, is there anything further you can do? I know you have flexed out about everything you can. But is there anything further you can do, or are we kind of stuck in this $50 million range including D&A? And then if you look at excluding D&A, just the pure SG&A number, that had been running at about $45 million for a while and it jumped up to $47 million this quarter. And I'm just wondering was that the -- was that this sort of push at the end of the rebate, or was -- is there some component of compensation that is driven by lumber prices?

No, not really, other than just on a commission basis. But as Chad said, our salaries and benefits were up -- what, Chad, it was a little over $1 million -- $1.2 million for the quarter over last year's quarter. Most of that increase was in the temp labor that we used to flex our labor -- almost the entire amount -- plus the fact that we added -- we put in some bonus programs for our people in the field in order to drive market penetration and to increase the sale of our specialty higher margin products. So we had to provide the funds to cover what it will be in anticipated pay outs in that area. And our bonus increase over last quarter was almost $400,000 to $500,000, somewhere in that range, and so between the temp labor and the bonus, our salaries were flat if not slightly down over the period last year, so--.

And so looking ahead to the third quarter, with lumber prices coming back down and this sort of surge in business behind us, would you anticipate that SG&A would roll back down by maybe that $1.5 million or so?

I think that's a reasonable assumption.

Yes.

Okay. Thank you.

(Operator Instructions). We will now go to Charlie [Lang] with Putnam Investments. Please go ahead.

Hey guys, can you talk a bit about some of the things you are actively doing right now to eliminate your cash burn in the current year, and maybe be a little more specific about levers you could potentially pull next year if necessary?

Well, we're obviously keeping very tight controls on our labor, constantly monitoring our FTEs, and as Floyd just mentioned, flexing them with sales volume. I really -- right now don't want to get into things we might do in 2011. We do have a laundry list of things, but none of them are set in stone yet, and a lot of it is going to depend on what housing does the rest of this year and what we think it is going to do in 2011.

Okay. And can we expect any tax refunds in the future?

Not unless the administration allows us to carry losses back to 2003 or 2004, so right now, we have exhausted all of our tax refunds.

All right. Thanks. That's all I had.

Our next question is from Bob Robotti with Robotti and Company. Please go ahead.

Hi. I guess I had a question about the volume, and what did you think about -- on the volume side, and were you ahead of budget, below budget for the quarter?

No, we were ahead of budget.

And what did you say? You actually said that in the South Region, homes under construction were actually up 1% (inaudible)?

You're fading out, Bob. We couldn't hear it.

Oh, no problem. For activity in the South, you said home starts were up 18%, but homes under construction were up 1%, and your volume was up 11%. Can you talk about those two differences between those numbers?

Well, that would indicate we gained market share.

And is that your thought that you really did?

If you just do that calculation, it would indicate we gained about 10% market share. I don't know what Floyd's gut is telling him. To me, I think 5% to 10% range of market share feels about right.

Yes. That's what I believe is the case.

And then you say the balance of it may be the imprecise nature of what they offer the region versus where you're maybe concentrated or not concentrated in markets, so therefore it isn't necessarily taking share?

That's true. It is not an exact calculation, that's -- .

And the -- .

As you know, Bob, there has been a -- started last June, a real disconnect between the start numbers and the homes under construction. The start does not produce a single dollar in revenue for us. The only thing that produces revenue for us is a home under construction. I think a lot of this is being -- is due to the fact that to get mortgage approval has become a very slow and tedious process. I think it has really slowed down the movement from a start into a home under construction, and I think for the most part, builders are not building spec inventory. They are building for those customers who they believe will be able to complete the transaction. And so it is delayed until they really see that there's going to be mortgage approval.

And I think that's what we are really seeing, and that -- so the homes under construction for the most part have been decreasing. And this was the first quarter where we have seen a flattening out, especially in the South Region, which is really more -- that's the region that we compete in, and it showed a slight uptick for the quarter, but still nothing to write home about.

And of course, everybody is concentrating in the quarter on gross margin compression, from a low of 22 -- tends to be at the low end of range, or those 21 and change, to 18, and everybody is attributing that to lumber. How much -- are there other mix issues that are coming into play there? Is lumber really the sole component of what is driving compression? Is there something else driving margin compression in this quarter?

No, the Lumber and Lumber Sheet Goods -- and by that I will say panels, the OSB, plywood, various thicknesses of OSB, and in the component area -- trusses, meaning roof and floor trusses, and exterior wall panels, is where most of the margin squeeze has come from. That probably accounts for close to 86% to 87% of the total market squeeze.

And then as you point out, inventories of course, in those components of course, turn even faster. So is it true that even quarter to quarter that it may not -- there may be wide variation between quarters even?

Wide variations on our margins on those products?

Correct. Because that's what I am thinking through, most of that inventory has already turned and has already moved out of inventory. So the impact in adjustment in prices pretty much hits the quarter P&L, and so it isn't necessarily a carryover in inventories so much. So to have back to back quarters that lumber has vastly different margins, is that possible? Or no, there's still going to be residual effects, so therefore to go back to 22% next quarter would be extremely difficult to anticipate?

Yes. It would be extremely difficult to move it back in one quarter. First of all -- and on most of your -- the 30 or 90 day forward pricing, there is a tail, and it can be up to as long as 30 days after the close of your quote period. And so you always have that as a carryover, plus the fact that in our particular case, on most of our commodities, we are carrying and we have on hand probably between 40 to 45 days. And then you have on order somewhere in the neighborhood of 10 to 12 days. So by the time you flush that higher cost inventory through the following quarter, you are not going to get the full benefit of the falling market.

And then a question, historically, I had the impression that some volatility in prices is potentially good for you, and that you have certain advantages, and so normally that is actually -- potentially can lead to margin expansion. Is that kind of still the case, but just when you get extreme movements like this, it is extremely hard to capture those benefits? Or is there also another dynamic that is cyclically playing a role here?

Typically a rising market is good for us. The problem that we had here, this was probably the fastest rise and the quickest fall of any commodity market that we have witnessed in quite some length of time. It is almost unprecedented how fast it moved up and then fell back, and that's what really caught you. But if you can plan and you have a reasonably good forecast for your usage for a particular period of time, yes, you can plan your inventories, and certainly a volatile market can be very beneficial to you.

Right.

We did not anticipate the way the demand curve skewed up and how quick that came upon us, and then as it began to fall away, and then coupled with the rapid increase and fall in the commodity market, we just got caught on the wrong side of the curve, and I suspect a lot of other people did the same.

Okay. And then when you talk about cash burn for the year, so we know your original was $60 million to $70 million, and of that, $24 million in both cases would have been interest expense, so that meant it was $36 million to $46 million. And so now you are saying $70 million to $75 million, so obviously still the same $24 million on the interest expense. What's the balance between -- how much of that is working capital?

In the past quarter, our working capital accounted for $15.5 million, almost $16 million.

Right. No, the full year number, the $70 million to $75 million that you are looking at today?

I think for the full year, our change in working capital will be close to zero, or it will be a minimal impact on the entire year, and of course, that's excluding the tax refund.

So, for example, a $70 million number, if working capital ends the year where it started, and there is $24 million of interest, the balance of that is all shortfall in EBITDA?

In CapEx, right.

And CapEx, though, is in aggregate going to be $8 million, $9 million?

Yes, that's right.

Yes.

Okay, thanks.

Thank you.

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

Okay. Well, we appreciate your listening in today, and if there's any questions that you might have after the conclusion of this call, don't hesitate to call Chad, and he will do his best to take care of whatever questions you may have. Have a good day.

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