Builders FirstSource Inc (BLDR) 2011 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Builders FirstSource second-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. We will conduct a question-and-answer session and instructions will follow at that time.

Any reproduction of this call in whole or in part is not permitted without prior written authorization of Builders FirstSource. As a reminder, this conference call is being recorded today, July 22, 2011.

The Company issued a press release after the market closed yesterday. If you don't have a copy, you can find it on our website at BLDR.com.

Before we begin, I would like to remind you that during the course of the 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 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 Floyd Sherman.

Thank you and good morning. Welcome to our second-quarter 2011 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 second quarter and then I will 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.

We were very encouraged by our second-quarter results as our near breakeven adjusted EBITDA was our best operating performance since the third quarter of 2007. We finished the current quarter with sales of $206.4 million, down just 2.4% compared to sales of $211.5 million in the second quarter of 2010. While single-family housing starts and average commodity prices were down 13.1% and 20.8% respectively over this same time period, our sales volume was up slightly, which we believe is indicative of significant market share gains during the quarter.

Despite our improved results, challenges still persist in the housing industry as a seasonally adjusted annual rate for US single-family housing starts in June 2011 was 453,000, which was basically flat when compared to June 2010. However for the current quarter, actual US single-family housing starts were down 13.1% as compared to the second quarter of 2010. We also saw a similar level of decline in actual US single-family units under construction during the quarter as they decreased 16.7% from the second quarter of 2010.

In the South region as defined by the U.S. Census Bureau which includes all of our markets, we saw similar trends actual single-family housing starts were 63,700 down 13.1%, and single-family units under construction were 116,600, down 14.5% compared to the second quarter of 2010.

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

Thank you, Floyd. Good morning, everyone. Looking at our second-quarter results, we reported sales of $206.4 million compared to $211.5 million last year, a decrease of $5.1 million or 2.4%. We estimate sales decreased 2.8% due to commodity price deflation, which was partially offset by a slight increase in sales volume.

Breaking down our sales by product category, Prefabricated Components were $40.2 million as compared to $41.2 million in the second quarter of 2010. Windows & Doors were up slightly at $46.6 million. Lumber & Lumbersheet Goods were $60.7 million, a decrease of $5.5 million or 8.2%. Our Millwork category was $21.6 million essentially flat when compared to the second quarter of 2010. Other Building Products & Services increased approximately 4% to $37.3 million.

From a sales mix perspective, our Lumber & Lumbersheet Goods category decreased to 29.4% of total sales, down from 31.3% of total sales in the second quarter of 2010 due to commodity deflation.

Our Other Building Products & Services category increased from 16.9% of total sales to 18.1% in the current quarter. This category was up primarily due to a sales increase of roofing and composite decking. All other product categories were fairly consistent from a sales mix perspective.

Our gross margin percentage was 20.7%, a 2.4 percentage point increase from 18.3% for the second quarter of last year and a 1.4 percentage point increase from the first quarter of 2011. The primary drivers of our margin increase were improved pricing on sales of our manufactured products during the quarter coupled with less volatility in the commodity markets. To a lesser degree, the increase in gross margin percentage can be attributed to a slight increase in sales volume combined with a decrease of fixed costs and cost of goods sold.

From a selling, general and administrative expense perspective, we achieved further cost reductions for the quarter as SG&A expenses decreased $2.5 million or 4.8% compared to the second quarter of 2010. As a percentage of sales, SG&A expense decreased from 24.3% in 2010 to 23.7% in 2011.

Our salaries and benefit expense excluding stock comp expense was $28 million for the current quarter, a 6% decline when compared to the second quarter last year. Our average full-time equivalent employees decreased 5.2% over the same time period.

Delivery expense decreased $200,000 in the current quarter primarily due to a reduction in equipment expense offset somewhat by higher fuel costs within the category.

During the current quarter, we recorded $1.9 million of facility closure costs primarily related to the closure of a distribution facility in Georgia. Interest expense was $5.7 million in the current quarter, a decrease of $900,000 from the second quarter of 2010, which was primarily due to the expiration of our interest rate swaps during the current quarter.

We recorded $1.7 million of income tax expense in the second quarter 2011 compared to a $300,000 income tax benefit in the second quarter of 2010. We recorded an after-tax non-cash valuation allowance of $6.8 million and $7.1 million in 2011 and 2010 respectively related to our net deferred tax assets. Absence this valuation allowance, our tax benefit rate would have been 37.5% and 38.5% in 2011 and 2010 respectively.

Loss from continuing operations was $15.4 million or a $0.16 loss per diluted share compared to $18.9 million or a $0.20 loss for diluted share. Excluding facility closure costs and evaluation allowance, our loss from continuing operations per diluted share was $0.08 for the current quarter compared to $0.12 for the second quarter of 2010, an approximately 33% improvement.

Our net loss for the current quarter was $15.5 million or a $0.16 loss per diluted share compared to a net loss of $19 million or a $0.20 loss per diluted share last year.

Adjusted EBITDA loss was a loss of $1.3 million and represents a $6.3 million improvement over our adjusted EBITDA loss of $7.6 million last year. From a working capital perspective, our accounts receivable days decreased to 33.3 days compared to 34.5 days last year. Inventory turns decreased to 9.3 turns, down from 9.8 turns for the second quarter of 2010 and our accounts payable days remained flat quarter over quarter.

Our cash used for the current quarter was approximately $14.5 million. Of this $14.5 million, $5.3 million was due to an increase in working capital and $1.1 million related to capital expenditures. The remaining $8.1 million was used to fund the interest in operating losses and is a $6 million improvement over the $14.1 million of cash used to fund interest in operating losses in the second quarter of 2010.

Our liquidity at the end of the quarter was approximately $112 million, down only $3.4 million from Q1 of this year. The $112 million in liquidity included $63.1 in available cash and approximately $48.9 million in borrowing availability under our revolving credit facility.

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

Thank you, Chad. So there continues to be a significant amount of uncertainty in the macroeconomic factors that drive housing demand. We're seeing positive trends in our results in spite of the difficult environment.

Due to the temporary momentum created by the expiration of the Federal Tax Credit for the first-time homebuyers during the first half of 2010, we expected comparable quarter-over-quarter results to be very difficult. However, even though single-family housing starts decreased over 13% during the second quarter of 2011, we were able to generate a similar level of sales and higher gross margins while also lowering our operating expenses.

As a result of our improved financial performance, we now expect our cash burn for fiscal year 2011 to approximate $50 million, which includes $5.3 million for the repayment of our remaining 2012 notes and expect to end the year with total liquidity of approximately $85 million assuming a continuation of current market conditions. This is a significant improvement over our original year-end liquidity forecast of approximately $70 million.

We remain committed to prudently managing the business through these very trying economic times and are very encouraged by our recent financial results. We are very appreciative of all of our business partners, both customers and suppliers, and very grateful for the dedication exhibited by all Builders FirstSource employees.

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

Thank you. (Operator Instructions). Seth Yeager, Jefferies & Co.

Good morning, Floyd and Chad. It's good to see some positive trends here. You guys did a good job of containing the cash burn during the quarter. But just quickly looking through the numbers here, it looks as if inventories or networking capital a little high relative to your seasonal average. Is that a function of commodity pricing or do you guys anticipated a bit of a pickup in your end markets?

I would say that it is more of just the strategic decision we made to make sure we are adequately supplied, to make sure we have a product on the yard and then protect ourselves from any potential unexpected commodity fluctuation, price fluctuation.

Okay, so you are sort of locking in -- you are hoping at this point to keep that gross margin above 20%. Do you think is a pretty reasonable assumption going into the next quarter?

Yes, I think that's reasonable.

Okay, great. What are the anticipated cash savings from the facility closure you guys announced during the quarter? Was that a leased facility?

It was a leased facility that we had mothballed. So we were obviously still paying out lease expense on that facility, but the economics changed a little bit. We found someone that was interested in subleasing it and so at that point, we decided to take them up on their offer and permanently close the facility. It's not going to be a significant cash savings.

Okay, and are there specific subregions that are performing better than others? Do you happen to have a breakout or just generally speaking the number -- percentage of facilities that are positive EBITDA before corporate overhead just to get a sense of geographically?

If you look at this quarter, we had all but I believe nine markets that were positive EBITDA.

That's correct.

During the quarter. I would some of the stronger markets right now would be Texas, Charlotte, Baltimore-Washington market, and Eastern Tennessee. Those are the ones that come to mind.

Great. And is that primarily a function of just market share gains and some improved mix or what's behind that at this point?

A lot of it is market share gain-driven. A lot of it, we owe to our sales force out there fighting every day to get pricing restored.

I think a continuation. We continue to lower our operating costs. We continue to refine our processes and I think all of those things are coming through. Seth, every one of our markets showed improvement over the comparable quarter a year ago. We've got -- and out of the nine that were not EBITDA positive, more than half of them were very, very close to being EBITDA positive.

That's great.

If we look at the last month of the quarter, which I might incidentally also say was our first black month in almost 45 months, there were only in that particular month, there were only four markets that were not EBITDA positive. So I am very, very encouraged by what our people are doing and it is still a brutal environment out there, but we are really I think starting to make some very significant gains and I will say it's largely attributable to our people and their efforts in the marketplace.

Thank you, I appreciate the color. And if I could just ask one more and I will pass the baton. It sounds as if your liquidity expectations have improved or continue to improve. What housing start level are you using for that guidance? Do you have any other additional plans around shoring up longer-term liquidity?

That guidance that we give is pretty much based on a continuation of current market conditions, so that's assuming we have similar conditions in Q3 as we had in Q2. And then obviously Q4, we would expect to be a little slower just due to seasonality. But pretty much just assuming a status quo of what we have been seeing.

As far as what we might do, we are obviously monitoring our liquidity constantly. We are encouraged about what we have been able to do this year so far. We have a few options we are considering and right now we're just taking our time. I believe our current liquidity position gives us the luxury of being selective and taking our time and we are going to do what's best for the Company. But we do have some options on the table we are considering, but that's really all I can say about it right now.

All right, great. Thanks for the color. Good luck.

Rob Hansen, Deutsche Bank.

Thanks. I just wanted to ask about the components of the cash burn. So it looks like $10 million of the burn comes from investing in financing and then the other $40 million should arise from operations. So that implies basically flat operating cash from here. Is that basically a correct assumption?

That's correct. You got to remember we are likely to take down just about all our working capital that has built up this year. That is a correct statement.

Okay, and then in terms of a couple quarters ago you were talking about some retail type operations. I know -- I think one of your competitors recently was -- announced some sort of plan as well and I just wanted to see if you guys had many strides on that or any update on that?

In some select markets we have put in some showrooms. I would -- some small retail places, some showrooms to cater to the repair remodeler, where before we weren't. I think that's probably in six or eight markets and we're going to see how that plays out over the next quarter or two before we decide to make any additional investment in that area.

Okay, then you mentioned that composite decking was a good quarter and I'm sure you saw I think it was Trex announced they had a tough sales environment this quarter. What did you guys do to see success in that or how did you come to that?

We opened a decking operation in the Baltimore-Washington market about a year ago and they have been steadily increasing their business and it also includes fencing. Plus we have made a concerted effort through our ongoing DCs to get more involved in the composite decking program and that is proving to -- has been a very good sales venue for us. And it's -- we see it as an expanding product line within our Company. Margins are better than traditional lumber building products and so we are gradually expanding our presence in this market area.

All right. Thanks, guys. That's good.

Brad Bryan, Imperial Capital.

Good morning, gentlemen. Congratulations on the improved results. Many of my questions have been answered, so I have one remaining question. And that is you had a healthy gross margin increase on a year-over-year basis. Did your inventory purchasing strategy play any benefit in that gross margin improvement?

No, last year was really tough, the first two quarters, just because of the wild fluctuations we saw in commodity. Though we have certainly been more concerned about protecting our inventory position and we have done that, but on the other hand, commodity prices have been relatively stable this year so far. So we were ready if it did happen. It didn't happen. I think it's more just gaining market share and like I said earlier, our sales force being very aggressive on getting pricing up.

Okay, very good. Last question, I know you are about three weeks into it but do you expect to see July also be an EBITDA positive month for the Company?

I think that's a little bit premature to say. Our -- I will say our sales per day average is running pretty close to what we saw in June, so we are not seeing any falloff in the level of business.

One of the things that helped us in June was also -- it was a 23-day shipping month. July is a 20-day shipping month for us and although the number of shipping day for the third quarter will be the same as the second quarter, July might be -- it will be close. I am very, very encouraged by what I am seeing and I feel pretty good about the third quarter right at this point.

Very good. Thank you for your responses.

Philip Volpicelli, Deutsche Bank.

Good morning. This is Sean Wondrack speaking on behalf of Phil. My question is with regard to working capital management, have there been any changes in the terms of your accounts payables from your suppliers or I guess any talk of potential changes?

No.

Nothing. So they're not requiring payments upfront and you are still providing materials on credit?

No, I think our suppliers have been -- because as a public company, of course the information that they have available to them with us is much better I think than most of the people they deal with. But I think they have been -- they feel very good about our liquidity, about the openness in which we will discuss our situation with them. And I think that they see how we have been operating the Company, how we've navigated through this period of time, how we have continually been improving our picture. And I think right now, they are very comfortable with us. So we have seen no change in or any new demand being placed on us.

All right. Thank you and good luck.

Howard Weinberg, UBS.

Could you talk a little bit about the growth? When we take a look at the sales per start on the South region, you've seen some pretty nice appreciation. I think it is around 3200 this month -- this quarter, 3100 the prior quarter. Last year it was 2900. Is this trend sustainable?

It sounds like July it is, but how are you doing it? Are you gaining -- is it new customers? Is it additional wallet share from existing customers? Is it a sales mix towards more value-added product? Maybe if you could give us any insight on how your sales force is differentiating yourself to get that (multiple speakers)

It's all of those things. I think very clearly we obviously are picking up some of the benefit of people exiting the market but I think even more importantly than that, we have definitely -- we are very aggressive. Our people are being extremely aggressive out looking for new business and expanding relationships with current business.

If we look at our new customer adds the first quarter against the second quarter, we have added almost a little over 900 new customers that we had not done business with previously. Many of them are smaller customers but still nevertheless extremely important to us. And we are -- some of the sales gain are coming from new customer adds. We have also continued to improve our value add. We continue to increase our install portion of the business. And so I think a lot of it is also the builder community is beginning to look at the supply chain and beginning to say who is really going to be here when this -- when the housing really returns? Who is going to be able to handle our work?

I think that the builders and our customer base feels confident about us. They are recognizing the values that we provide, the quality of our services, the responsiveness we have on a job site, and I think we are beginning to take business away from a lot of our competitors that are still in the marketplace competing against us.

And so when it's hard to really say it is any one of those particular areas, I think it's a combination of all those factors.

Great, thanks. And could you talk -- we're seeing a lot of data with respect to multifamily growth relative to what single-family growth is doing. Could you talk a little bit about what you are doing, what initiatives you are doing in the multifamily and what type of growth we could expect in that?

We have -- we certainly have been building the infrastructure that is required to service this side of the business and it is a different infrastructure than our normal business. I will tell you that a lot of the multifamily numbers and the improvements that you are seeing are being registered in permits and starts. That doesn't mean that it has become units under construction yet. There is a -- we see a continual building of the backlog of projects that are getting ready to be started. Our order files are definitely increasing are the quotes that we have out in which we track on a continual basis are definitely up considerably over where they were a year ago. We have enlarged our -- the staff that we have that does the engineering that does the estimating and does all of the pre-work that's required to bid on these large projects. And we think it's going to really pay off for us.

We have definitely increased our installed workforce and we anticipate that this will be a larger piece of our business on a go forward basis than what it is right now. Our estimate right now is I think probably -- what, Chad? -- maybe about 15% on the last numbers that we have seen is the percentage mix of our business.

And that 15% is today?

Right.

Do all of your locations currently have capacity to do the multifamily?

We control the multifamily and do most of the estimating and bidding out of two service centers that we have established. We have the ability to oversee the projects once we get started at each one of our locations and we will have trained personnel at any -- at a location that will be involved in those projects. But all of the estimating, design work, engineering and so forth is done at one of two centers, actually three, I should say.

Great, thanks. Then just finally, and I think you talked about it earlier but I'm not sure I followed it. But with respect to the working capital for the rest of this year, will it be a source of cash or will it be a use of cash?

I think over the course of the entire year, it's going to be close to neutral. It could go a couple million dollars either way, but it should be -- it would be pretty close to neutral.

And Chad, that's December to just December or is that June to December?

Oh, it will definitely be a cash inflow the back half of this year. For the entire year, it will be relatively neutral.

Great. Thank you very much, guys. That's all.

Bob Robotti, Robotti & Co.

On the multifamily, I guess you just said, is it around 15% of the current sales mix? Is that what you think?

Right.

I'd be curious what was it same quarter last year?

Probably fairly close to the same.

Okay, so it really hasn't -- you haven't seen any change in the mix yet because --

You know, if you go back three, four years, it was less than 5%.

Right, and then he same thing was in multifamily was that Shelby is with -- you have the steel trust business and that was really to be kind of in commercial, industrial low-end kind of things. Are you doing much in that area? What does that look like? Is that an opportunity for you?

I think it's still -- we still feel it's an opportunity for us and right now the level of activity that we have is a lot of things on the drawing board, a lot of things that will be coming out. It just hasn't broken yet. But we anticipate that could be a good facility for us. We have converted it. We're doing a lot of single-family and other light commercial projects out of that operation now. But the metal trusses, some of those jobs are still waiting to come forward. But that's one of the three locations where we do have our commercial planning.

And do you think there's anything different in the working capital requirements for this business? Obviously you talked about it's a little different structure in terms of how do you bid it and how do you manage it. On that end of the spectrum, will it also be in any way different in terms of requiring more or less working capital?

Certainly it could cause your AR days to go up on these jobs. These jobs, especially the four-, six-month duration jobs you could have some AR out there a little longer than you would on a single family. And then you will have some retainage at times with these jobs. But I don't think it would have an impact of any significance on inventory or AP.

And then a really minor item, the facility you are closing in Georgia, that's one of the distribution locations that you have and can you tell me which one it is? Then give even some breakdown on the $1.9 million in terms of how much of that is writing off capitalized expenses, how much of it is cash, and how much of it is the obligation for future cash? So how much of the $1.9 million is either current or future cash calls and how much is not?

It was near Atlanta and it was almost entirely related to our remaining lease obligation, that $1.9 million.

So it's really not a current cash but it's a remaining cash payment over the lease term is the bulk of that expenditure?

That's correct.

And I guess near Atlanta, you have two locations even north of Atlanta. I guess it's one of those. So did they serve the Greater Atlanta markets? Is it all part of the market and so what's the concept behind it? Do you think you're not giving up kind of market share or you are losing a little flexibility and some delivery but you're not really leaving your market or how do you think about that closure?

It's been mothballed for a couple of years.

We haven't used the facility for several years.

We hadn't needed it due to lack of demand. We were servicing the market out of another location. We just had someone come along that wanted to sublease it from us, so we took advantage of that.

It hasn't and won't affect us at all in that particular market. We can still adequately handle demands in the market and we don't -- really don't see this as we looked at it and started -- went through. And you ask yourself the question, how important is this going to be even if the market comes back to near normal? And with a lot of the things that we are doing now we've learned how to improve our business and so forth, it is not a facility that would be strategically important to us.

Okay and the increase in the install business, I guess it's in the last component of Other Building Products & Services. Does that all go in there and that's why it gets all the other -- you know on a quarterly basis, each one of the other four components was down some or down a little bit more I guess in case of lumber and that is probably price-related. But in the other products and services, it's actually up some.

So I guess is that the increase install would go in that segment?

Well, installed labor does go in there but the increase this quarter was more related to roofing and decking.

So would that mean that it goes into prefabricated components or --?

No, it was actually decking like it would be on -- deposit decking like on a patio or a porch and it was actually roofing materials, shingle type --

Okay, so that line item is two things, other products and services, so it's not services the install. It is really other products, the roofing products, that's what you're saying?

For this quarter that was the primary change. That's correct.

Great and so do you then -- so is the install part more of an anticipatory thing or --?

No, it's still a significant part of our business. It's still 15% of our business.

Right, but I thought you had said that actually the installed business had already improved some and picked up and you were doing more install.

Yes, we do -- it has improved slightly over when you go to a quarter-over-quarter comparison. You've got to remember, though, housing starts, Bob, are down significantly from where they were and so they get the amount that you have available to you and the same way on multifamily. We have not seen the increase in starts and permits translate yet into work in progress on the multifamily. We anticipate that that's going to be really starting to come through in the quarters ahead, but haven't seen that yet.

Okay, thanks.

Brian Horey, Aurelian Management.

Hi, thanks for taking my question. Can you comment at all on how you see the sales mix evolving going forward?

You know, I wouldn't expect any substantial change in the near term. We could see a higher mix on the installed labor side on the multifamily side. And I do think as demand really starts to return to normal levels, you will see prefabricated components become a higher part of the mix due to just the increased demand and the pressures that will be on the builders to get the houses built quicker. I think there will be more demand on that side of the business.

Okay, and can you give us a sense as to what your ongoing cash costs of your closed facilities are on a monthly or quarterly basis?

Right now it's around $4 million a year that we're paying out on closed facilities for leases.

Okay, thank you.

(Operator Instructions). Jack Kasprzak, BB&T Capital Markets.

Thanks. Good morning, guys. Could you just refresh our memory on how many total markets you have?

32.

32, and in the commentary about margins in the quarter which were up, I think you guys referenced sales mix as a positive factor of feverishly trying to follow -- write down what you were saying. Is that right and could you elaborate on that again please?

It had a very small impact on margin during the quarter, the sales mix did and that's just a better mix of prefabricated components, value-added products, doors, windows, things like that. But it was a small impact.

Okay. And with regard to the third quarter, you mentioned so far July sales per day pretty similar to June. Would you think third-quarter sales would be pretty similar to second-quarter sales even given that the market is -- remains in a year-over-year basis in a down trend? Can you give us any help there?

Yes, the way things are looking right now and if the housing and the market continues on at its current level, which will be -- which will certainly -- is nowhere near what anybody had projected at the beginning of the year. But if things continue on about the same level as what we are seeing right now, we would anticipate that we will hold to the same average sales per day and we would hope that we can continue to gain on it. We think we are going to continue to improve our market share gain.

Okay, that's great. Suffice it to say though at this point, you're not getting any help from the underlying market. It's really the things that you guys have done to take share.

That's correct.

Okay, great. Thank you very much.

We would like to be able to see improvement in the level of housing, but when you look at it, we have dramatically lowered our breakeven point and we have really improved substantive improvements in how we operate the Company, the permanent reduction of costs and so forth. Any real spike in housing improvement we can leverage off that very, very well. And I think our current numbers are certainly reflective of that.

Do you have an estimate, an updated estimate for what annual housing starts would have to be for you guys to break even on an earnings basis?

Go ahead, Chad.

From an EBITDA perspective, we have been saying recently we need about $900 million in sales. We have actually -- I think that's a little high. I think we can be positive or breakeven EBITDA at a little bit less sales than that. If we continue at the sales per start that we have been running at recently, you're probably talking around 525,000 starts would get us to breakeven EBITDA. We'd probably need another 75,000 starts or so to cover cash (multiple speakers)

That's single-family, right?

Right.

Okay, guy. Thank you very much.

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

All right, we really appreciate your interest in the Company and joining us on the call. We look forward to our call at -- for the third-quarter results. Thank you.

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