Builders FirstSource Inc (BLDR) 2010 Q3 法說會逐字稿

Good morning and welcome to the Builders FirstSource third 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 is whole or in part is not permitted without prior written authorization of Builders FirstSource. As a reminder this conference call is being recorded today October 22, 2010. The Company issued a press release after market the close 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, financial results, business strategies and industry tread. 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 provided reconciliations of nonGAAP financial measures to their GAAP [equivalations] in our earnings press release and detailed explanation of nonGAAP financial measures in Form 8K filed yesterday, both of which are available on our website. At this time I'll turn the call over to Floyd Sherman.

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

The third quarter 2010 show a decline of housing starts as the September seasonally adjusted annual rate for US single family housing starts decreased to 452,000 down 10.8% from September last year. Actual US single family housing starts for the current quarter was 119,600, down 13.5% from the third quarter of 2009. We saw a similar level of decline in actual US single family units under construction as they decreased 12.8% from the same quarter last year.

Despite the decline of building activity our sales of $180.4 million were down just 4.5% from sales of $188.9 million in the third quarter of 2009. The south region, as defined by the US Census Bureau and which encompasses our entire footprint experienced similar trends of the actual single family housing starts of the third quarter of 2010 decreased to 59,400 down 13.7% for the third quarter of 2009 and single family units under construction were down 5.9% over the same period.

While pricing in the commodity markets is has stabilized, we continue to experience same competitive pricing conditions we've been faced with in recent years. More specifically, we are experiencing increased margin pressures on our prefabricated components and to a lesser degree other noncommodity products. With the decline of building activity, the cycle time on new home construction is not as critical. There's also an ample supply of labor in the market which makes thick framing in many of our markets viable alternative to prefabricated components. These factors have contributed to the customers becoming even more focused on price in an attempt to reduce their cost of construction. As a result, our current quarter gross margins declined 1.2 percentage points compared to the third quarter of 2009. Though our margins improved 1.4 percentage points for second quarter of 2010 primarily due to lack of volatility in the commodity market coupled with an improved procurement strategy.

From an operating expense perspective, we continue to focus on our cost containment initiatives. During the current quarter, we temporarily idled four manufacturing facilities, two in Maryland and two in Florida and two distributions centers in South Carolina in order to reduce operating expenses and excess capacity. Most of the customer demands from these idle facilities will be serviced by other existing locations within the market. Subsequent to quarter end, we currently closed our Little River distribution center in Grand Strand market, South Carolina market. I'll now turn the call over to Chad who will review our third quarter financial results in more detail.

Thank you, Floyd, good morning everyone. We reported sales of $180.4 million compared to $188.9 million a year ago. This is a decrease of $8.5 million or 4.5%. Breaking down our sales by product category; Prefabricated components was $36.3 million as compared to $36.5 million in the third quarter of 2009. Windows and doors decreased 8.5% to $40.9 million. Lumber and lumber sheet goods increased 7.4% to $50.1 million. Our mill work category decreased $0.9 million or 4.6% and other building products and services decreased 17.2% to $33.5 million.

From the sales mix perspective lumber and lumber sheet good increase from 24.7% total sales in 2009 to 27.7% in 2010 largely due to commodity inflation. Our other building products and services category decreased from 21.4% of total sales to 18.6%. This category, which includes labor revenue on installed services, was negatively impacted by the quarter-over-quarter decline in the number of multi-family units under construction which was down 47% in the south region. The fact that this product category declined only 17% compared to the 47% decline in multi-family units under construction will seem to indicate we have made good in roads in this area of construction. All of the categories was fairly consistent from a mixed perspective.

Gross margin percentage was 19.7% down from 20.9% a 1.2 percentage point declined. As previously discussed by Floyd this decline was primarily due to competitive pricing pressure on our noncommodity products.

Turning to SG&A. Our selling, general and administrative expenses decreased $1.7 million or 3.4% for third quarter of 2010. Included as a reduction to SG&A expenses is a $1.2 million litigation settlement. As percentage of sales SG&A expense excluding stock comp expense and the litigation settlement increased from 25.8% in 2009 to 26.4% in 2010. For the quarter, salaries and benefits excluding stock-comp expense was $28.5 million or 15.8% of total sales compared to $28.4 million or 15% of total sales in the third quarter of 2009.

Office G&A expense decreased $1.7 million from the third quarter of 2009 primarily due to litigation settlement discussed earlier. Occupancy expenses were down $100,000 or 2.6%. Delivery expense decreased $800,000 or 7.6% while our write off and recovery expense increased to $500,000 in the third quarter of 2010 up from $100,000 in 2009. We recorded an asset impairment charge in the current quarter of $800,000, which included $700,000 relating to leasehold improvements and $100,000 related to land held for sale. There was no asset impairment charges in the third quarter of 2009.

Interest expense was $6.9 million in the current quarter, an increase of approximately $1 million over the third quarter of 2009 primarily due to higher interest rates during the current quarter, partially offset by lower average debt balances. We recorded an income tax benefit of $500,000 during the quarter compared to $100,000 of expense in the third quarter of 2009. We recorded an after tax noncash valuation allowance of $7.2 million and $6.2 million in 2010 and 2009 respectively, related to our net deferred tax assets. Absent this valuation allowance, our tax benefit rate would have been 38.4% and 38.5% in 2010 and 2009 respectively.

Loss from continuing operations was $19.7 million or $0.21 per diluted share compared to $15.9 million or $0.41 per diluted share in 2009. Excluding devaluation allowance, our loss from continuing operations per diluted share was $0.13 and $0.25 for 2010 and 2009 respectively. Our loss for discontinued operations for third quarter of 2010 was $800,000 or $0.01 per diluted share and related to the adjustment of subtenant income for our discontinued Ohio operations. Our loss from discontinued operations for the third quarter of 2009 was $700,000 or $0.02 per diluted share. Adjusted EBITDA was loss of $8.3 million compared to loss of $4.8 million in the third quarter of 2009.

Our total liquidity in September 30th was approximately $126 million, which includes $121.4 million in available cash, $4.2 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 inclusive of the $1.2 million litigation settlement we received in September was $3.2 million. Reductions in working capital contributed $12.1 million of cash during the quarter, which was offset by $1.6 million of cash used for capital expenditures, primarily associated with lease buy outs on rolling stock and the remaining $13.7 million in cash was used to fund operating losses and cash interest.

From a working capital perspective, our accounts receivable days decreased to 35.7 days for the current quarter, compared to 36.4 days in the same quarter last year. Offsetting this improvement was decrease in inventory turns, which dropped to 9.5 turns compared to 10.5 turns for the same quarter of 2009. Our accounts payable days held steady quarter over quarter at 28.9 days. Working capital expressed as a percentage of sales for the quarter was 9.6% compared to 9.1% one year ago. I'll now turn the call back over to Floyd for his closing comments.

Thank you, Chad. Though the volatility in commodity markets has subsided, concern market conditions remain difficult in 2011. We remain committed to our proven strategy of conserving liquidity while monitoring and adjusting as necessary physical capacity and staffing levels. As expected seasonal reductions of working capital now help reduce our use of cash during the quarter. We still believe our liquidity at year end will range from $100 million to $110 million and while we do not expect 2011 to be a robust year of new home construction, we are hopeful we'll see some improvement over 2010 and that 2011 will signal the beginning of a sustained recovery. I'll now turn the call over to operator for Q and A.

(Operator Instructions). Our first question comes from Seth Yeager with Jefferies & Company.

So, considering the environment, you did a great job at managing working capital during the quarter, but it looks you may have gotten stuck with some additional inventories. Given that framing lumber pricing has continued to stay pretty strong, is your cash guidance in the fourth quarter based primarily on squeezing out some additional cash out of that line item?

I'll estimate the fourth quarter, our working capital would probably contribute $5 million to $8 million of cash. Floyd could probably speak more towards inventory levels. He's more involved on the purchasing side of things. I do know we have been active in trying to make some strategic purchases in order to protect our margins in the upcoming quarter.

We have been -- we've been making some good strategic buys. Our current inventory reflects the buys that we've made to prepare us for the first quarter of next year. We are not fully covered for the first quarter obviously of next year. I suspect there will be some pull back in our overall inventory dollar levels. A lot of it is going to depend upon if we're able to really secure favorable buys for the first quarter of 2011. So we're just watching the market very closely and taking advantage whenever we see an opportunity to lock in our (inaudible).

Is it possible to quantify what the cost savings may be from the idling and the closure of the facility post quarter end?

A lot of that depends on how much of the existing business we're able to retain and service from nearby locations. I would guess from a cash burn perspective the closures that we've done could be $3 million to $5 million in cash savings next year that's primarily comp and benefits.

Okay, following up on that I apologize this is long winded leading up to the question. But, if we look into 2011 hypothetically let's just assume starts improve somewhere around 650,000 which I think you have said in the past it's your EBITDA break even, assuming with that improvement, working capital I would imagine there would be a little bit of use of cash and with the fixed charges that you have, -- rough math with the cash guidance you've given this year, leaves you towards something around $15 million to $20 million at year end next year, all else equal. What cuts are necessary to lower your fixed cost base to stem the burn and more strategically plan B, are you talks with any advisors or have you spoken with your sponsor to look at any alternatives for funding?

To answer the first part of your question, 650,000 starts next year would be a great problem to have.

Right.

It pinches our liquidity a little bit.

But at the same time if we've seen those type of starts, I'd really like -- I would hope we can see those type of starts, it also starts, I think from a pricing standpoint, we start alleviating some of the competitive pricing pressures that we have on us and our margins certainly start moving on at that point, we're also in that type of market we can turn our inventory better because we're able to pass those increases on. I don't think from where I sit here, I really don't see that there's a need at this point, you'd be going out and asking at the same -- other alternatives that it might be needed. I don't really see the liquidity crunch under that scenario or what's going to be facing us.

I'd be surprised the our liquidity got that low at the end of next year, at that start level. And if the housing environment has recovered that much, I think that would certainly, if needed, open up new financing opportunities. To answer the last part of your question, no, we have not had specific conversations with our sponsors yet on what actions we might take next year if we do need more liquidity. Right now, we feel like the cuts we've done are adequate and we're just going to have to keep monitoring the situation. As far as what additional things we can do. Right now, we don't feel like we need to do any, but if conditions warrant, we'll act as necessary which would most likely be similar actions we've taken this quarter, but we're hoping it doesn't come to that.

If I can get one more final in here, last year you didn't take any goodwill impairments in the fourth quarter, where you sit today after a few years of negative EBITDA, is that something you'll think will happen this go around?

It's possible our forecast has already been on the conservative side even doing that we had quite a bit of cushion in our goodwill impairment analysis at the end of 2009. It's possible we could take some right now. We haven't run those numbers. So we'll just to have to wait and see.

Okay. I appreciate it. Good luck.

And the next question comes from Brad Bryan with Imperial Capital.

Okay. Good morning, gentlemen. First, just a quick housekeeping item. The litigation settlement, what did that relate to?

That was a material supply issue.

Okay. Very good. Second could you talk a little bit about market conditions, on a monthly basis within the third quarter and what you've seen so far in October, in terms of trend?

Are you talking about on a construction standpoint or are you talking about on commodity margins.

I'm talking about from a construction and competitive standpoint.

From construction standpoint there was -- it was still very weak out there, we really, as we moved to the third quarter the activity continued to slow down and I think it was evident in the numbers that we indicated in the first part of our opening comments as we elaborated on them. The -- that's, right now we have very very little forward visibility. Our business as it has been for some time now, we are running our business on a day-to-day basis, that's about all the future visibility that we have. The activity in October is not as good as what we saw in September. There is some feeling that November will be a little bit better, but that still remains to be seen. Right now, we are preparing for and we've set up our operations based upon where we think that the fourth quarter is headed and that will be a weaker quarter than from a housing construction standpoint than what we saw in the third quarter.

Okay. Thank you very much.

Next we have Philip Volpicelli with Deutsche Bank.

Good morning.

Good morning.

Just wondering if you gone through in the exercise figuring out if you will have a tax refund this year and what size it will be? Obviously you had a very big one at the beginning of this year that helped with tax issues.

No, unfortunately, we've carried back as far as we can against taxable income so we've exhausted for the time being all federal refunds.

Building on Seth's question earlier, would you consider merging with another entity to try to get -- build scale involved to get through the downturn or do you think you've got what you need in terms of support from your sponsors and cash on the balance sheet to make it through to hopefully a better environment in either 2011 or 2012?

We certainly consider it, like we said all along, under the condition that we don't hurt our liquidity position. We're certainly not going to risk the mothership in order just to merge or make any type of acquisition.

Okay, great. Thank you.

We'll take the next question from Chris Doherty with Oppenheimer and Company.

Good morning. Just a housekeeping item. What were the LCs at the end of the quarter?

Our outstanding LCs?

Yes.

15.8.

Right at 15.8.

What are those securing? Are they securing new jobs? Or are they just standard corporate LCs? The question is if business starts to pick up, are you going to see that number increase?

The majority of it is related to our casualty insurance coverage. It's possible if business picked up and our casualty exposure increase, we might be forced to increase that.

That's it. Thank you.

(Operator Instructions). We'll take the next question from David Manthey with Robert W. Baird.

Hi. Good morning.

Good morning.

Floyd, I think in your prepared comments you mentioned something about the fact that home builders have surplus labor and time, which to some extent limits their requirements for some of the services that you provide. I'm just wondering your thoughts if starts do reaccelerate as you talked about earlier in the call, what would you growth be relative to the market? Do you think that if we do see even a significant jump in housing starts that the behavior of the home builders will change back to, requiring your services or do they continue doing what they're doing now and using the cheap plentiful labor and affording themselves a little more time.

I think as we see an improved housing market emerging, there will be a definite movement back to a greater use of prefabricated components. I think labor under those conditions will start seeing some real inflationary cost increases on the labor side. Also from a timing standpoint, again, that becomes very critical and your ability to have a very controlled clean job site becomes a lot more important and I think we will see an acceleration in the use of components. Not all markets have we seen basically above the Mason Dixon line, there haven't been any real conversion to stick framing. It's only in isolated markets where you see this taking place and at least where from a pricing standpoint where you have to adjust your component pricing to be competitive with some of the stick framing folks that are out there. But I still feel, I'm very very positive, very -- part of the reasons that we are just mothballing some of our manufacturing facilities because I think we're going to be -- we will be in a very, very good position to move quickly back into the supply of these products to the building marketplace.

Okay. Thank you.

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

This concludes our third quarter conference call. We really appreciate your attendance in participating with us. If you have any other questions concerning any of the information that was presented, just give Chad a call and he'll be glad to talk further with you about any points that you might have. Have a good day.

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