Builders FirstSource Inc (BLDR) 2011 Q1 法說會逐字稿

Good morning and welcome to the Builders FirstSource first quarter 2011 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. And as a reminder, this conference call is being recorded today, April 25, 2011. The Company issued a press release before the market opened today. 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 the 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 this morning, both of which are available on our website.

At this time, I would like to turn the call over to Mr. Floyd Sherman.

Thank you and good morning. Welcome to our first-quarter 2011 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 first quarter 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 will take your questions.

Our sales for the first quarter of 2011 were $162.8 million, up approximately 1% when compared to the first quarter of 2010, despite an approximate 20% decline in single-family starts over the same time period. Commodity prices for lumber and lumber sheet goods were on the average comparable over this time period.

We believe our improved sales performance, despite the difficult macroeconomic environment was due to our strong competitive position, the addition of new sales personnel, and competitors exiting our markets and is indicative of market share gains over this time period.

The March 2011 seasonally adjusted annual rate for US single-family housing starts decreased to 422, 000, down approximately 21% from the annualized rate of 535,000 in March 2010. Actual US single-family housing starts for the first quarter of 2011 were 89,900, a decrease of 21.4% compared to the first quarter of 2010.

In the South region, as defined by the US Census Bureau, and which include all of our markets, we saw a similar trend as actual single-family housing starts were 52,700, down 19.3%, and single-family units under construction were 110,800, down 14.6% compared to the first quarter of 2010.

First-quarter gross margins were 19.3%, up 1.1 percentage points from 18.2% in the first quarter of 2010, and better than the 19.1% gross margins from the fourth quarter of 2010.

Slightly increased sales volume combined with a decrease of fixed costs and cost of goods sold was the primary driver behind our gross margin improvement for the quarter.

Looking at our operating expenses on a quarter-over-quarter comparative basis, we again demonstrated our ability to control costs as selling, general and administrative expenses decreased 5.5% on $1.4 million more in sales. Adjusted EBITDA lost in the current quarter was $9.7 million, an improvement over the adjusted EBITDA loss of $15.3 million in the first quarter of 2010.

And for the recently completed month of March we achieved gross margins of approximately 20% and near breakeven adjusted EBITDA which is very encouraging heading into the spring and summer building seasons.

I'll 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 $162.8 million compared to $161.4 million last year, an increase of $1.4 million or approximately 1%.

Breaking down our sales by product category, prefabricated components were $30.8 million as compared to $32 million in the first quarter of 2010. Windows and doors increased 3.6% to $38.2 million. Lumber and lumber sheet goods increased $3.7 million or 8.4%. Our millwork category was $17.7 million, essentially flat when compared to the first quarter of 2010. Other building products and services decreased 7.7% to $28 million.

From a sales mix perspective, lumber and lumber sheet goods were 29.5% of total sales, up from 27.5% of total sales in the first quarter of 2010, primarily due to an increase in pricing and to a lesser degree volume.

Our other building products and services category decreased from 18.8% of total sales to 17.2%. This category was down primarily due to lower labor revenue on installed services. Our other product categories were fairly consistent from a mix perspective.

Our gross margin percentage was 19.3%, a 1.1 percentage point increase from 18.2% for the first quarter of last year. Our gross margin percentage increased due to the slightly increased sales volume combined with a decrease of fixed cost within cost of goods sold.

Our selling, general and administrative expenses decreased $2.7 million or 5.5% for the first quarter of 2011. As a percentage of sales, SG&A expense decreased from 30.6% in 2010 to 28.7% in 2011.

For the current quarter, our salaries and benefits expense, excluding stock compensation expense, was $26.6 million, a decrease of $1.6 million when compared to the first quarter of 2010. Our average full-time equivalent employees decreased 7% over the same time period.

Delivery expense decreased $800,000 in the current quarter primarily due to a reduction in equipment lease expense offset somewhat by higher fuel costs and higher depreciation expense within the category.

Interest expense was $5.9 million in the current quarter, a decrease of $5.4 million over the first quarter of 2010. Our interest expense in the first quarter of 2010 included a write-off of $1.6 million of unamortized debt issue costs related to long-term debt repay during the quarter and $2.5 million of expense related to our rights offering and debt exchange. Interest expense also decreased $800,000 from the first quarter of 2010 due to a reduction in fair value adjustments on our interest rate swaps.

We recorded no income tax benefit during the quarter compared to $100,000 benefit in the first quarter of 2010. We recorded an after-tax non-cash valuation allowance of $8.1 million and $11.6 million in 2011 and 2010 respectively related to our net deferred tax assets. Absent this valuation allowance, our tax benefit rate would have been 38.4% and 37.6% in 2011 and 2010 respectively.

Loss from continuing operations was $21.1 million or a $0.22 loss per diluted share compared to $31.2 million or a $0.38 loss per diluted share. Excluding transaction costs and the valuation allowance, our loss from continuing operations per diluted share was $0.13 for the current quarter compared to a loss of $0.21 per diluted share for the first quarter of 2010 excluding debt issued costs, write offs and the valuation allowance.

Our net loss for the current quarter was $21.2 million or a $0.22 loss per diluted share compared to a net loss of $31.4 million or a $0.38 loss per diluted share last year.

Adjusted EBITDA was a loss of $9.7 million, a $5.6 million improvement from a loss of $15.3 million in the first quarter of 2010.

From a working capital perspective, our accounts receivable days decreased to 33.4 days for the current quarter compared to 36.1 days last year. Offsetting this improvement was a decrease in inventory turns which dropped from 7.5 -- dropped to 7.5 turns compared to 9.1 turns for the same quarter of last year, primarily due to strategic commodity inventory buys designed to protect our pricing commitments with our customers.

Additionally, accounts payable days decreased to 30 days, down from 34.4 days for the first quarter of last year, again due to increased commodity purchases which typically carry shorter payment terms.

Our net cash used for the quarter was $25.6 million. Of this amount, $8.4 million was due to an increase in working capital and $500,000 is related to capital expenditures. The remaining $16.7 million was cash used to fund general operations and is a $4.2 million improvement over the $20.9 million of cash used for the same purpose last year.

Our liquidity at the end of the quarter was approximately $115 million, which was better than anticipated due to our improved financial performance. Our $115 million of liquidity consisted of $77.6 million in available cash and approximately $37.8 million in borrowing availability under our revolving credit facility. We still expect our cash usage for fiscal 2011 will be in the range of $55 million to $65 million and to end the year with total liquidity of approximately $65 million to $70 million.

On April 4, 2011, we announced our intent to offer $250 million aggregate principal amount of senior secured notes due 2019 and our intent to amend and extend our senior secured revolving credit facility in conjunction with and subject to the success of the notes offering.

Given our current liquidity position of over $115 million, and given that our current revolving credit facility will not expire until December 2012, this proposed financing transaction was opportunistic in nature. The transaction terms being suggested by the market were not acceptable to us and as a result we have decided not to move forward with this transaction.

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

Thank you, Chad. We are encouraged by our first-quarter financial results especially in light of continued housing market challenges, the difficult pricing environment and the overall state of the economy. As we anticipated, quarter-over-quarter comparisons will be very difficult through the first half of this year due to the temporary momentum created by the expiration of the federal tax credit for the first time home buyers during the first half of 2010.

We remain optimistic about the long-term health of our industry and our ability to endure the trying conditions those of us in the housing industry continue to face. My sincere gratitude goes out to all Builders FirstSource employees for their ongoing dedication and commitment to seeing the Company through this downturn.

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

(Operator Instructions). Rob Hansen, Deutsche Bank.

Your sales after the first couple months of the year were down 4% and then they ramped up over the end of the quarter so that they were essentially up a little bit. What divisions did you see the continued momentum in March and where was the outperformance?

I think regarding product categories it was pretty consistent across all categories. What we have seen a lot this quarter was an increase in the number of the smaller builder customers that we're selling to, which that's the primary reason our sales held in as well as they did. But from a mixed perspective it was across most product categories.

And -- from a market perspective as well, we had a relatively strong performance across most of our markets.

And then just looking at your customers, do you feel that the distress amongst them has largely abated? Are all the survivors stable financially?

I think that's generally a true statement. I certainly think the worst is behind us from a customer credit perspective. Our write-offs peaked I believe in 2008 and 2009 and I think we are certainly starting to see our credit exposure drop back down to historical levels.

All right, thanks.

Seth Yeager, Jefferies & Co.

Hi, good morning, guys. Thanks for taking my questions. You noted near breakeven EBITDA in March and throughout the quarter your revenue per unit metric was up about 15% despite the decline in overall starts. Can you talk about some of your strategies given that continued low level? I think you've mentioned looking at more exposure to R&R and some of the multi-family stuff as well as just a more rational pricing environment.

That's correct. Certainly the couple you mentioned already, the repair/remodel, where we are in certain markets going to try to go after more of that business and as we've been doing the past few years, increasing our share of the multifamily and light commercial side of the business.

Again, I think probably what surprised us more than anything this quarter was the increase in smaller customers. And if you look at Q4 and Q1, our last two quarters, we opened up almost 1000 new accounts, most of those being to smaller builder customers. So there certainly seems to be a lot of those guys coming off the sidelines and certainly it's a business we're going after.

And I also have to add the importance and the gains that were shown with the addition of new sales personnel, especially in markets where our competitors have either shut down or they have abandoned the markets and the addition of sales personnel have allowed us to build and retain and add a lot of these newer customers as well as expand our presence with existing customers. So the new sales personnel are also a very important factor in our sales penetration gain.

All right and then I think on the last call you had mentioned some of the large national homebuilders that had started to come back into the market. Is that sort of abated? It seems like the focus now is on more of the smaller guys.

No, I think we still have very definitely not changed our focus on any particular group. Just right now we're seeing a lot of activity and a lot of new smaller builders entering -- getting back into the market and starting to develop a lot of the small odd lots that are available. And so that's -- we're certainly benefiting from that. But we have not reduced our focus at all on the national builder.

We are going to be selective in the business that we take, trying to improve our margins to get better pricing and we've got to balance that very carefully. And that -- but it's not a correct statement to say that we are reducing our focus on the large national builder.

Okay, thanks. And it looks as if inventories are up about 15% or so year over year, but you guys made some pre-purchases of lumber. Is that -- I mean, do you anticipate keeping gross margins above that 19% threshold with the current pricing environment?

I certainly think that -- that's what we're shooting for and I think it's certainly feasible.

All right, thanks. And then a last question -- it looks as if you've got a few million from SG&A but may have added some new sales guys. What sort of levers do you have to pull there? Are we going to see the same sort of percentage of sales going forward? And then are we going to see any meaningful professional fees in the second quarter from the bond road show?

As far as your first question, I think you'll continue to see some slight year-over-year declines in SG&A, nothing that I would call significant but certainly could be a few million dollars each quarter. As far as expenses, we expensed almost $1 million in the first quarter related to the road show and right now my best guess is we might have another $1 million in the second quarter. But I don't think it would be too far off that number.

Okay, thanks a lot. Good luck, guys.

Nishu Sood.

Hey, thanks. Good morning, guys. I had a question kind of following up from Rob's earlier about the health of your consumer base. And Floyd, I'm thinking back to about a year ago, we had sat down and we were talking about the health of your customer base. And you mentioned a really interesting statistics to me which was that the number of your accounts in terms of the builders out there had actually increased for the first time during the downturn in the first quarter of 2010.

And so a very, very interesting data point, kind of on the -- running counter to folks' views that builders just continue to fall left and right. So I wanted to kind of follow up on that. What's been the trend since the first quarter of last year?

Yes, we have seen a continuing increase in the number of new customers. In fact, in the first growth quarter of this year we added, I think the total was 305 new customers that we had done no business with at all during 2010. Most of the customers that were being added were small -- what I would classify as smaller builders. But there were a couple of larger regional type builders in the mix.

And we saw a continual increase of new customers being added during the course of last year. Some of that is coming because the number of players in the market have been reduced. Some of it's coming because of the aggressiveness of our salesforce and we've gone out and been very active in soliciting new business and trying to expand our business with existing customers.

So it's a mixture of the two that are driving the new account development.

So you wouldn't necessarily take that as a general statement of the health of the remaining players that are still left standing, or that there is actually an increasing number of builders out there? It could be principally because of market share efforts and your sales efforts. Which do you think it is?

I think it's a combination of both. And a lot of your new builders, we're starting to see a lot of private equity financing going in and supporting some of the new builders entering the market. And so I think there is more of an upbeat feeling about housing and where housing is headed. I don't think anybody is saying that we are suddenly going to see a major or very significant improvement in the rate of housing this year. But very definitely I think we are beginning to feel better; at least we don't see it getting worse.

Got it, got it. And your expansion into the light commercial and trying to get more exposure to multifamily and other kind of customer verticals, is that a big part of your customer expansion as well? And is that mainly from kind of existing customer contacts that you have?

No, it's not a major part of the customer inquiries, but there are some very significant business gains that we've made in this area and we will continue to look to expand our presence in this particular market area. But it is a relatively few number of customers that are involved.

But a lot of them are new customers.

Yes.

Got it. All right. Great. Thanks a lot.

Brad Bryan, Imperial Capital.

Good morning, gentlemen. I have two questions for you this morning. First, it sounds like March was an encouraging month for you. Can you talk -- I mean I know April is not completed yet, but can you talk about whether that trend continued so far in the April month? And is there some prospect that you might be able to reach EBITDA breakeven in the second quarter?

I would say April has thus far trended pretty consistent with March. We're certainly pleased with what we've seen so far. Is it possible to break even in Q2 or Q3? I'm keeping my fingers crossed. I think there is a chance we can. I certainly can't guarantee anything but that certainly would be nice and that's something we are shooting for.

Okay, very good. The next question, just given current pricing and gross margin outlook, can you update us on the level of single-family housing starts you think you are required for EBITDA breakeven and cash flow breakeven?

Yes, with our sales first start we've seen in the last quarter, it certainly increased from our historical average of around 1500 per US single-family start. That's certainly lower than the number of starts we will need. I think a better way to look at it might be that we need about $900 million in revenue, my current projection, to breakeven from an EBITDA perspective.

So at 1500 per start, you're looking at about 600,000 single-family starts. If you take the run rate we were at for the first quarter, that drops you down to a much lower level, 500,000 to 550,000. So a lot of it's just going to depend on can we keep our sales pace where it was in the first quarter. But if you want to run some models, I think using about $900,000 in revenue is the way to do it.

$900 million.

Yes, $900 million in revenue is the way to do it. And whatever assumption you want to use on a sales per start will get you your -- the starts needed.

Okay, fantastic. And how about then from a cash flow breakeven, any update in terms of --

No, I think that would still take about another 75,000 single-family starts above your breakeven EBITDA point.

Okay, very good. Thank you.

Philip Volpicelli, Deutsche Bank.

Good morning. With regard to the I guess proposed and now terminated bond transaction and bank debt transaction that you guys had contemplated, two questions. One, what exactly -- which terms exactly were not acceptable to you?

And then two, are there any plan Bs? In other words, is there any chance of an equity offering or a rights offering from your two largest shareholders? Or what are your thoughts in terms of gaining liquidity?

I really can't comment that there was any specific -- it was just the overall feeling that the communications we were getting back from the marketplace that indicated to us that -- because we went into this with a -- it was opportunistic financing and what we were hearing coming back to us really wasn't going to meet what our expectations were. And because of our liquidity position we don't have to do anything right now.

And as you know going forward, there is a lot of various forms of debt and equity and financing that available to us and we will continue to look at these alternatives which we feel will improve our Company's long-term financial condition.

And right now, as I said, our current liquidity allows us a time to evaluate any of the opportunities that come our way. And so that's really all I can really comment on as to the reasons why we broke it off.

Okay. And I guess that's -- from your comments what I'm hearing is that there is nothing imminent in terms of a Plan B. You'll wait, see how things progress and then maybe look to come back to the market later if you do break even and the second or third quarter is probably an easier story to tell.

Yes, I would say that's an accurate assessment.

And would it be -- just hypothetically here -- continue to look to just issue debt or would you also look to issue a combination of debt and equity?

I think as I said before, there is again -- there are various forms of debt and equity financing that is available and we will evaluate whatever we feel is going to be in the Company's long-term best interest. And I can't really say where it's going to be or what the makeup of it may be until we have a chance to evaluate what's available to us.

And then last question from me -- in terms of M&A in the space of mergers and acquisitions, is there anything -- have you guys thought about possibly selling the Company? Is that something that the largest equity holders would consider? Or do you intend to continue to do the good fight on a stand-alone basis?

No, selling the Company has not been (multiple speakers)

-- discussed --

And we've not been a part of any of those conversations.

Our efforts have all been towards making sure that we would be a survivor during this housing downturn and I think we've proven that we've had very, very good strategy for doing so.

Great. Thank you very much.

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

Okay. Well, we appreciate your joining us today. If you have any further questions, don't hesitate to give Chad Crow a call and we will try to help you the best way we can. Have a good day.

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