Builders FirstSource Inc (BLDR) 2010 Q4 法說會逐字稿

Good morning, and welcome to the Builders FirstSource fourth-quarter and fiscal year 2010 earning's 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, and as a reminder, this conference is being recorded today, February 18, 2011. The Company issued a press release after the market close yesterday. If you don't have a copy, you can find it on our website at www.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 trends. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995, and are subject to certain risk 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 earning's press release, and detailed explanation of non-GAAP financial measures in our form 8-K 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 our fourth-quarter and fiscal year 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 fourth quarter and fiscal year, and then I'll turn the call over to Chad, who will discuss our financial results in more detail. After my closing comments regarding our outlook, we'll take your questions.

For the current year, actual US single-family starts were 471,100, a 5.9% increase over 2009. This marks the first time in the past five years there has been a year-over-year increase in housing starts. For the fourth quarter of 2010, however, it is evident that challenging conditions still persist, as actual US single-family starts for the current quarter were 95,600, a decrease of 8.7%, compared to the fourth quarter of 2009.

In the South region, as defined by the US census bureau and which encompasses our entire geographic footprint, actual single-family starts were 49,900, down 9.3% from the fourth quarter of 2009, and single-family units under construction were 116,800, a decrease of 8.2%, compared to the fourth quarter of 2009. Despite this decline in construction activity, our sales of $147.1 million for the current quarter were down just 4.5%, when compared to sales of $154 million in the fourth quarter of 2009. These sales results, even when adjusted for commodity inflation, would indicate we gained market share during the quarter. We look to continue this trend, but only where these gains are at acceptable margins. The competitive pricing pressures we had seen throughout the first nine months of 2010 were still present during the fourth quarter, but we have recently seen signs that suggests pricing discipline maybe returning to the market.

Fourth quarter gross margins were 19.1%, as compared to 19.7% in the fourth quarter of last year. For the year, we felt the negative impact of commodity price volatility seen during the first half of 2010, as gross margins declined to 18.8% for the year, a 2.2 percentage point reduction from the gross margins of 21% in 2009. We were able to partially mitigate this margin pressure by continuing our focus on expense control, management of head count and flexing capacity where appropriate. We have done this while maintaining a presence within all of our markets. We've also become a more efficient Company, and feel we are well positioned to respond to any increase in building activity. I'll now turn the call over to Chad, who will review our financial results in more detail.

Thank you, Floyd. Good morning, everyone.

For the fourth quarter of 2010, we reported sales of $147.1 million, compared to $154 million for the fourth quarter of 2009, a decrease of $6.9 million or 4.5%. Breaking down our sales-by-product category, prefabricated components were $26 million, as compared to $29.2 million in the fourth quarter of 2009. Windows and doors increased 1.3%, to $36.8 million. Lumber and lumber sheet goods increased 3%, to $40.8 million. Our mill work category decreased $0.3 million or 1.5%, and other building products and services decreased 16%, to $26.8 million. From a sales mix perspective, lumber and lumber sheet goods increased from 25.7% of total sales for the fourth quarter of 2009, to 27.7% in 2010, largely due to commodity inflation.

Prefabricated components decreased from 19% of sales to 17.7% of sales, primarily due to pricing pressure placed on this category by the availability of framing lumber, and a reduced focus on construction cycle time. Our other building products and services category decreased from 20.7% of total sales, to 18.3%. 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 approximately 26% in the South region. All other categories were fairly consistent from a mixed perspective. Our gross margin percentage was 19.1% for the fourth quarter at 2010, down from 19.7% in the same quarter last year. This decline was primarily due to competitive pricing pressure.

Our selling, general and administrative expenses decreased $4.1 million or 8.3% for the fourth quarter of 2010. As a percentage of sales, SG&A expense, excluding stock-based compensation expense, decreased from 32.3% in the fourth quarter of 2009, to 31% in the current quarter, on $6.9 million less sales. Average full-time equivalent employees, excluding discontinued operations for the fourth quarter 2010, were down 4.9% from the fourth quarter 2009 average. Salaries and benefit expense, excluding stock comp expense, was essentially flat at $26.1 million, compared to $25.9 million in the fourth quarter of 2009. Office G&A expense fell $3.3 million, or 42.3%, due primarily to $3 million of recapitalization costs we incurred in the fourth quarter of 2009. Delivery expense decreased $800,000, or 8.3%; occupancy expense fell$ 200,000, or 4.9%; while our bad debt expense decreased $900,000 from the same quarter last year.

Interest expense was $6.9 million in the current quarter, a decrease of approximately $600,000 from the fourth quarter of 2009. We recorded a $100,000 income tax benefit during the quarter, compared to $33.2 million in the fourth quarter of 2009. Our tax benefit during the current quarter was reduced by an after-tax non-cash valuation allowance of $9.4 million, related to our net deferred tax assets. Our tax benefit was increased in the fourth quarter of 2009 by a $21.1 million reduction of the valuation allowance, primarily due to tax legislation that allowed for an extended carry back of net operating losses. Absent the valuation allowance, our tax benefit rate would have been 38.9% for the fourth quarter of 2010. Absent the valuation allowance and impacts of changes in tax law, our tax benefit rate would have been 36.9% for the fourth quarter of 2009. There are presently no federal income tax carry-back refunds available to us, but we have approximately $124 million of federal net operating losses that can be carried forward to offset future taxable income.

For the current quarter, our loss from continuing operations was $24.5 million, or $0.26 per diluted share, compared to income of $6.2 million, or $0.16 per diluted share in the same quarter last year. Excluding the valuation allowance and debt issue cost write-offs, our loss from continuing operations per diluted share was $0.15 for the current quarter, compared to a loss of $0.33 per diluted share for the fourth quarter of 2009, excluding the valuation allowance and recapitalization costs. Our loss from discontinued operations, which includes the results of our discontinued Ohio and New Jersey operations, was $100,000 for the fourth quarter of 2010, compared to income of $300,000 for the fourth quarter of 2009. Adjusted EBITDA in the current quarter was negative $12.5 million, down slightly from the negative $12.2 million in the fourth quarter of 2009, on $6.9 million less sales. Adjusted EBITDA for 2010 was negative $43.6 million, as compared to negative $35.1 million for 2009.

Although sales were up year-over-year, competitive pricing pressure, combined with extreme volatility in commodity prices during the first half of the year, negatively impacted our margins. We were able to partially offset this negative impact through SG&A reductions. Our total liquidity at December 31, 2010, was $125.8 million, which included $103.2 million of available cash and $22.6 million in borrowing availability under our revolver. Outstanding borrowings under our revolver were $20 million at the end of 2010 and 2009. In November of 2010, we amended our 2007 senior secured revolving credit facility. The amendment provides us with up to $25 million of additional borrowing availability by reducing our minimum liquidity requirement, which was previously set at $35 million. This amendment also reduced the maximum borrowing capacity under the facility from $250 million to $150 million, thus decreasing our annual interest expense related to commitment fees by approximately $400,000.

Our available liquidity at December 31, 2010, was not affected by the reduction of our maximum borrowing capacity, as our eligible accounts receivable and inventory balances, which are used to calculate the available borrowing capacity, did not support $150 million in borrowings. Nor do we anticipate that these balances will support borrowings in excess of $150 million at any point during the remaining life of the credit facility, which extends to December 2012. For the current quarter, our cash usage was approximately $18 million, which was slightly higher than anticipated, as we increased inventory purchases towards the end of the year in an attempt to protect our first-quarter 2011 pricing commitments.

For the quarter, reductions in working capital contributed only $2 million, which was offset by approximately $1 million in capital expenditures, and $19 million of cash used to fund operating losses and service debt. Cash used for 2010 was approximately $83 million, which excludes the $33.8 million federal income tax refund received in 2010, as well as $67.9 million in proceeds from the rights offering we completed during the year. Of the cash used in 2010, approximately $6 million related to an increase in working capital; $9 million related to capital expenditures, primarily for buy-outs of vehicle and equipment leases; with the remaining $68 million used to fund the operating losses of the Company and cash interest payments.

We expect our cash usage for 2011 to be $55 million to $65 million, and expect to end the year with total liquidity of $65 million to $70 million. This forecast is based on $520,000 single-family starts for 2011, market prices for commodity products remaining relatively stable, anticipated gross margin improvement in the range of 150 basis points, and operating expense structure consistent with current levels, and capital expenditures of $3 million to $5 million. In the event that housing starts for 2011 are higher or lower than forecasted, or other assumptions prove to be inaccurate, our forecasted cash usage and liquidity levels may change.

For the current year, our asset utilization improved, as our working capital expressed as a percentage of sales was 9.3%, excluding cash and income tax receivables, down from 10.2% in 2009. Accounts receivable days decreased to 35.5 days for 2010, compared to 38.8 days last year, as we continued reducing our overall delinquency rate, and increase the rate of our overall receivable collections. Our inventory turns were essentially flat year-over-year, ending at 9.1 turns for 2010. Accounts payable days increased to 31.5 days, up from 28.9 days last year. Our focus on working capital management resulted in cash conversion days dropping to 44.2 days for 2010, a 5.1 day improvement over 2009.

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

While interest rates remain near record low levels, the economy is still faced with high unemployment and foreclosures that congest the new home sales pipeline. Through this, however, we are seeing some signs that point to improvements in our business. Recently, we have seen a return of certain customers that we had previously lost due to pricing. The return of these customers is due in part to our ability to offer a service level that we believe is unsurpassed in the industry, and which aids the customer in job-site control.

Competitive pricing pressures continue, but in certain markets we saw some signs of slight easing towards the end of the year. We were able to increase our liquidity through the recent amendment to our credit facility, and previous efforts to lower our operating structure should make us a more efficient Company going forward. Even though many industry forecasters are predicting that housing conditions are expected to show improvement during 2011, the first six months of 2011 may be difficult, especially on a year-over-year comparative basis, due to the momentum created by the expiration of the federal tax credit for first-time home buyers during the first half of 2010. We are, however, optimistic about the long-term outlook for our industry, and believe that Builders FirstSource is well positioned to take advantage of the recovery, once it does come.

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

(Operator Instructions)Seth Yeager of Jefferies & Company.

During the quarter, I would have anticipated commodity inflation a bit more of a tailwind, at least with the numbers that I look at. Framing lumber was up almost 17%, and you guys pre-bought some inventories in third quarter. Can you just help me reconcile that difference? Is some of that going to be a marginal improvement felt in the first quarter?

When we quote commodity inflation and do our impact on sales, we use an internal index.

Okay.

Which is a blend of framing lumber, plywood, panels and OSB. And when we do that, we came up with an 11% commodity inflation for the quarter. So I'm not sure what your inflation number would indicate.

Okay, but either way, are we going to see some of that being passed through in the first quarter, given that you guys ended with a bit higher inventory than usual, again?

We are certainly hopeful that, yes, that translates to some improved margins in Q1.

You have to keep in mind during that first quarter, volume changes can really affect our fixed cost on the COGS. So, some of that advantage may be lost if the sales don't develop.

Sure, thank you. On a cash basis, you guys basically ended the year in line with guidance, or previous guidance. Can you just remind us of your, with your current footprint, your EBITDA and free cash flow break-even levels, as you sit today?

At margins of what we would call normal margins in the 20% to 21% range, I think we can be EBITDA break-even at 600 to 650 single family starts. At those margins it would probably take another 75,000 single family starts or so to cover our cash interest.

That's in the South region, that's also anticipating that the South still represents somewhere approximately 50% of the US start.

Right.

All right. I appreciate the color on the cash outlook for the current year. Just to make sure I have this correct, you are ending or you anticipate to end the year with total liquidity at $65 million to $75 million. How much of that would you anticipate is cash versus borrowing availability?

Probably in the neighborhood of $50 million in cash.

Okay, and then do you guys have any other levers you can pull, as far as, I know you've done a good job of cutting on the SG&A side. Is there anything else there, or any anticipated asset sales that you guys could maybe do during the year?

We have some real estate that we have on the market. Obviously, it's not a great time to be selling real estate, but we are taking a look at that. As far as SG&A expenses, there is a few things we will get a benefit for in 2011, nothing that's going to move the needle significantly. I would guess $3 million to $5 million maybe in SG&A reductions. So yes, we've cut just about as deep as we can cut right now.

All right, and then last question, and I will get back in queue. You mentioned some older customers are starting to come back in the market, and maybe a more rational pricing environment. Given that we are just over halfway through first quarter, any chance you can give us a sense directionally how things are shaping up? I appreciate it.

So far, the first quarter, we are near our forecast, we are near our plan. It's obviously been rough in some markets, especially in January with the weather, and then in February in Texas it was rough. Right now, all I can say is we are near where we forecasted we would be.

Thanks a lot.

Philip Volpicelli with Deutsche Bank.

Chad, I missed some of the outlook guidance that you gave in terms of the cash burn liquidity starts and gross margin. Can you just go over those again? I apologize.

No problem. We estimate our cash used for 2011 will be $55 million to $65 million, with an ending liquidity at year end of $65 million to $70 million. That forecast was based on 520,000 single family starts. It also incorporates some margin improvement, some slight improvements in SG&A, CapEx in the $3 million to $5 million range.

Perfect. In terms of the margin improvement, with the commodity prices increasing, is that what you're counting on for the margin improvement, or is it a combination of that, and better discipline within the marketplace in terms of pricing products?

I wouldn't say we are counting on that. Last year we took a pretty big hit the first half of the year with the extreme volatility. We are obviously not anticipating that much volatility this year; I would estimate that volatility last year cost us about $5 million in gross profit. That's a pick-up we would have this year. We just have to be more aggressive, and fight to keep our margins up. I wouldn't say that hinges on commodity inflation at all.

We are also beginning to target and look more to the smaller builders. Also, we're starting to really look at how we can get more involved in the repair/remodel business in some of our markets. This has been an area that has been a very small part of our Company's overall total sales, with the exception of some of our smaller market areas that have a good involvement. But in our larger markets, we really haven't done a lot of business in this area. We feel this -- we need to look harder at that. How we can possibly take advantage of this particular market segment. That should offer us better margins, certainly than what we see in the new home construction side.

We are also looking to, and we feel that we have to improve our margin performance in our component business. The component margins have been driven down. There is still an excess capacity that exists. There has been an elimination of a pretty significant amount of capacity in the past year in this area. We are just going to have to start fighting to pull our pricing up. This is an area that has probably contributed more to the margin decline in our Company than any aspect of our business. It's time to start making the necessary adjustments to start bringing it up.

Right. In terms of getting more involved in repair and remodel, that would be introducing new products into your distribution channel, as opposed to going out and actually installing. Is that accurate?

I wouldn't say necessarily new product. It's really more of setting up some locations to service that type of customer. You get more walk-in business, as an example, with that type of customer. And some of our locations currently aren't really conducive to that.

Right, so it's targeting the contractors themselves and finding out what they are doing.

Right.

Okay, thank you very much.

Stephanie Baas with Robotti & Co.

Good morning Stephanie.

It looks as though she has just disconnected. We will move on to Brad Bryan with Imperial Capital.

First, a housekeeping, if I could walk through in terms of the guidance you gave with 2011. Can you also give us your expectations for cash taxes and working capital changes in 2011?

Cash taxes will be minimal. We are obviously not paying any federal taxes. So it would just be a very small amount of some other miscellaneous taxes coming through. Working capital, I don't anticipate that providing or using much in the way of cash in 2011.

Okay, thank you. Next question, can you just give us a little qualitative flavor for the commentary that was in the earnings release about seeing some pricing discipline returning to the market?

Yes, in a very limited number of markets where we are starting to see improved business activity as you would anticipate as the level of activity increases, it does increase the prospects for improving margin. You don't have as many starving people out there fighting over what small amount of business is available.

I think also, as we have seen, the elimination of competitors in those markets. This certainly has improved from a supply/demand match-up standpoint. It's starting to reflect itself in the bidding process.

What we have seen is still very much in the early stages, where we are bidding on available work, and work that will be coming to us in the current quarter. But there is indications that we can maybe, in a very select number of markets, we are starting to move those margins up. Whether it will continue, and whether as business activity improves in other markets, it remains to be seen whether we will see the same performance starting to take place, but we are hopeful of it.

Okay, thank you very much.

(Operator Instructions)Mark [Manish] with [Manish] Family Ltd Partnership.

I wanted to ask -- you touched on it a little bit with components, but do you expect any help from competitors exiting any of your significant markets during the course of 2011?

Yes, I definitely feel, by our count, we have lost from our markets 92 location closings. Many of those are single owner operators, and approximately $800 million of capacity has been pulled out. That definitely should enable us to start moving our pricing up and improving margins. There still is an over-capacity situation that exists, but not nearly as bad as it has been in the past year. I think the rest of it's going to have to come from our standing fast, and maybe as business activities improve, you can be a little bit more selective as to the business that you choose to go forward with. That's an internal discipline we have to practice.

I definitely feel that the environment should allow us to start getting to where, on an engineered product, we can move our pricing. Up until now, the builders' attitude to a great extent has been, you can provide me components at the same price I can do it conventional stick framing. With labor being as cheap as it is, that's what we had to compete with. You had to have so much business going through your plants just to get some absorption of the fixed costs. And to protect your engineering staff that's been built up to support a component business, which is highly specialized and very, very difficult to quickly develop and put those people on with an improvement in business. You did what you had to do to survive, but now it's time that, I think, we are going to be able to start getting a greater value for our products.

Thank you, sir.

Rob Gutman with Robotti.

I just wanted to know two brief things. If you could just revisit why inventory was higher year-over-year, and where you mentioned you are seeing signs of pricing discipline, I was wondering in what areas are you starting to see those signs? What are the signs?

I can address the inventory question. Floyd can probably address your other question a little better. If you remember at the end of 2009, we were actually, I would say, a little short on commodity products. We were going through the recap; we didn't have the excess liquidity that we felt to make a big investment in commodities at that time. If you are looking at our 2009 balances, I think they are a little low, lower than they should have been. As we mentioned earlier, in the fourth quarter of 2010, we made the decision to be a little more aggressive on the commodity inventory buys in order to help protect our first-quarter pricing. So I think that's the differences you are seeing there.

On a year-over-year basis on our commodity inventory, the end of December of 2010, we had roughly 25-point, almost $26 million of inventories compared to the previous year where we had about $13.7 million of inventory. We made a decision that we felt that the commodity markets were going to be very volatile this year, especially with the China influence. We felt in order to protect ourselves, and to keep from what hit us in the second quarter of last year with a tremendous spike up in price that we saw and a falling off, that we had to make an investment in inventory, to try to prevent that from happening again. So far, with what is going on in the market, we made some very good decisions in that area.

We are going the continue to carry probably a heavier commodity inventory than we typically would, because until we can see more of a stability in the pricing on the commodity markets, and it still remains to be seen just how much of an effect the opening of the Chinese markets is going to have on the wood products industry. The increase of materials going to the market from mainly the Canadians, but as well it's starting now with the US West Coast mills, it's absolutely astonishing. And it's really become a very significant factor that's come into play in the commodity markets over the past year, and what we see coming up in 2010.

The markets, yes, I really don't want to talk about what market and pricing, because all that does is get people to -- our customers on the other end to maybe begin saying -- hey, we need to take a look at this. So, I really don't feel it's on our best interest to discuss, other than to say, for the first time we have seen some slight signs.

Okay, thank you very much.

Rob Hansen, Deutsche Bank.

I wanted to ask you about the customers that you mentioned in the release. At what point in the downturn did they leave your business? Also, what divisions were they customers in?

Again, I think some of them are the large national builders. I really don't feel it's appropriate at this time to begin giving specific names, but sufficed to say, if one would look at, several of them are out of the top builder 20.

Okay, and I just also wanted to get an idea, what you think is different about your service levels compared to the peers that, maybe as customers come back?

Our service level is superior than the competitors.

How do we measure that? We measure that from what we hear from our customers, and we are hearing it specifically as to the reasons some of the people are coming back to us. There have been a number of examples from some of our major competitors where they have been unable to honor or deliver what they've committed to, to the builders in terms of the materials going to their sites, and whether it's been inventory-related issues from a coverage of cost or whatever, I don't know that. But we hear repeatedly from the field, as well as discussions at the national level of many of these customers, where they will openly tell us that we service a job site and we control a job site, and the quality of our people servicing the job sites are superior to anyone else that they deal with.

That's some of the reasons why we are starting to get pulled back in to where maybe pricing isn't the only consideration. That some of these other factors are extremely important, and I think another reason, as they look down the road, they are starting to say -- who are going to be the survivors in this business, and what's their ability to handle us when business really starts to improve. And that's a concern I think that a lot of builders are beginning to have, is that who is going to be around. We need people to service our job sites. They've seen how we've performed, and they see that we continue to commit ourselves to the markets that we have been doing business in; we haven't exited those markets. We maybe have moth-ball facilities, but we have maintained presence in the markets, and we've maintained a high level of service and a quality of personnel. All of those things are starting to come back in our favor.

That's great to hear, thanks, guys.

At this time we have no further questions. I'll turn the call back over to management for closing remarks.

Okay, well, we appreciate your interest in our Company. And if there is any other questions, or you want to have any other further discussions with us, please call Chad Crow.

Once again, ladies and gentlemen, that concludes our conference. Thank you all for your participation.