Builders FirstSource Inc (BLDR) 2011 Q3 法說會逐字稿

Good morning and welcome to the Builders FirstSource third-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.

As a reminder, this conference is being recorded today, October 21, 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 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 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 would like to turn the call over to Floyd Sherman. Please go ahead, sir.

Thank you. Good morning and welcome to our third-quarter 2011 earnings call. Joining me from our management team is Chad Crow, Senior Vice President and Chief Financial officer.

After I give a brief recap of our third quarter, 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.

Despite the continued sluggish housing market, we saw a strong improvement in our third-quarter 2011 results as our adjusted EBITDA loss decreased to only $700,000, our best operating performance since the third quarter of 2007. This also marks the third consecutive quarter of improved adjusted EBITDA results when compared to the same quarter of the prior year in spite of a continuing very weak housing market.

We finished the current quarter with $217.2 million in sales, up 20.4% over the prior year and improved our adjusted EBITDA results by $7.6 million. Our financial results, while still not satisfactory to us, have continued to show improvement even though the housing market remains very challenging, as does the overall state of the economy.

The seasonally adjusted annual rate for US single-family housing starts in September 2011 was 425,000 units, which is down 4.9% when compared to September, 2010. For the current quarter, actual US single-family housing starts were down number 1.4% as compared to the third quarter of 2010. In the South region, as defined by the US Census Bureau, and which includes all of our markets, actual single-family housing starts were up 5.1%, while units under construction declined 10.2% for the current quarter.

Since our potential for revenue begins once a start converts to a unit under construction, we believe that 20.4% sales increase during the quarter represents a significant improvement in our financial and operational performance in an otherwise weak housing environment.

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

Thank you, Floyd. Good morning everyone. I feel like I need to warn everyone I am on the tail end of an epic battle with the flu, so I still have a lingering cough. I'll did my best to get through this without too much coughing, but I apologize in advance if I'm not able to do so.

For the current quarter, we reported sales of $217.2 million. This was an increase of $36.8 million or 20.4% compared to $180.4 million last year. We estimate sales increased approximately 22% due to increased sales volume which was partially offset by commodity price deflation.

Looking at the breakdown of our sales by product category, Prefab Components were up 13.1% to $41 million. Windows & Doors were $51.3 million, up 25.4% when compared to the third quarter of 2010. Lumber & Lumbersheet Goods were $61.9 million, an increase of $11.8 million or 23.7%.

Our Millwork category increased $2.6 million to $22.2 million. Other Building Products & Services increased 21.6% to $40.8 million. From a sales mix perspective, we saw no significant changes in mix among our product categories.

Our gross margin percentage was 20.5%, up from 19.7% for the third quarter of last year. The primary driver of our improved margin was the increased sales volume, combined with a decrease of fixed costs within our cost of goods sold. These improvements were offset slightly by a decrease in sales price.

Turning to SG&A, our selling, general and administrative expenses were $50.2 million, an increase of only $2.6 million or 5.5% from the same quarter last year despite a 20.4% increase in sales. As a percentage of sales, SG&A expense, excluding stock compensation expense and the benefit of a $1.2 million litigation settlement recorded in the third quarter of 2010, decreased from 26.4% in the third quarter of 2010 to 22.3% in the current quarter.

For the current quarter our salaries and benefits expense, excluding stock compensation expense, was $28.8 million, a slight $300,000 increase when compared to the third quarter of 2010.

Delivery expense increased approximately $500,000 due largely to higher fuel prices during the quarter. I think it's important to note here that if you ignore the benefit of the $1.2 million litigation settlement we received in Q3 last year, and you ignore stock comp expense in both periods, which is obviously non-cash, our SG&A only increased $800,000 quarter-over-quarter on almost $37 million more in sales.

Floyd and I have been anticipating that due to all the changes we have made to the business over the past few years, that once sales stabilized and then actually started to increase, we were going to leverage very well. We certainly liked what we saw in the current quarter.

Interest expense was $5.3 million in the current quarter, a decrease of $1.6 million from the third quarter of 2010, which was primarily due to the expiration of our interest rate swaps during 2011.

We recorded $300,000 of income tax expense in the third quarter of 2011 compared to a $500,000 income tax benefit in the third quarter last year. We recorded an after-tax non-cash valuation allowance of $4.7 million and $7.2 million in 2011 and 2010 respectively related to our net deferred tax assets. Absent this valuation allowance, our tax benefit rate would have been 39.2% and 38.4% in 2011 and 2010 respectably.

Loss from continuing operations was $11.5 million or a $0.12 loss per diluted share compared to $19.7 million or a $0.21 loss per diluted share. Excluding the valuation allowance, our loss from continuing operations per diluted share was $0.07 and $0.13 for 2011 and 2010 respectably.

Our net loss for the current quarter was $11.6 million or a $0.12 loss per diluted share compared to a net loss of $20.5 million or $0.22 loss per diluted share last year.

Adjusted EBITDA was a loss of $700,000 compared to a loss of $8.3 million last year. And as Floyd pointed out earlier, this represents a $7.6 million improvement over the prior year.

Our working capital management improved in all areas as our accounts receivable days decreased to 33.6 days compared to 35.7 days last year. Inventory turns increased to 9.8 turns, up from 9.5 turns for the third quarter of 2010. And our accounts payable days increased from 28.9 days last year to 30.4 days in the current quarter.

Our cash usage for the current quarter was approximately $10.2 million. Of this, $2.9 million was attributable to increased working capital needs, the result of higher sales during the quarter, while $1.1 million related to capital expenditures. The remaining $6.2 million was used to fund operating losses and cash interest, and represents a $7.5 million improvement over the $13.7 million of cash used for the same purposes last year. This was due largely to the increase in our sales for the current quarter as well as improvement in gross margins.

Our liquidity into the quarter was $100 million. The $100 million in liquidity included $52.9 million in available cash and approximately $47.1 million in borrowing availability under our revolving credit facility.

Subsequent to the end of the third quarter, we repaid the $5.3 million principal balance on our 2012 notes. We expect our fourth quarter to essentially be cash neutral, as cash used to fund operations, pay interest, and repay our remaining 2012 notes should largely be offset by seasonal reductions in working capital. As a result, we expect our cash burn for fiscal 2011 to approximate $50 million to $55 million, and we expect to end the year with totally liquidity of approximately $80 million.

As we discussed on our second-quarter earnings call, we continue to explore various financing alternatives in order to strengthen our liquidity position. However, our improving financial results, our current liquidity of $100 million, and the fact that our current credit facility does not expire until December 2012, affords us the time to be selective, consider every alternative carefully, and to find a deal that is in the best long-term interest of both our shareholders and our employees, and that is what we intend to do.

As far as specific details surrounding potential financing opportunities, please understand that we are not able to discuss these matters at this time. I will now turn the call back over to Floyd for his closing comments.

Thank you, Chad. Housing demand remains weak due to the struggling economy, high unemployment and the limited availability of mortgage financing. Though these conditions persist, we are still optimistic about the long-term outlook for our industry due largely to the increasing disparity between the current low levels of housing starts and the ongoing housing demand being created by current demographic trends.

We are gaining marketshare thanks to the intense effort of our salesforce and our outstanding customer service. And we continue to improve our operating results despite the challenging economic conditions which we face. I'm certainly appreciative and proud of our accomplishments which are due to the dedicated efforts of all of our employees.

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

(Operator Instructions). Seth Yeager, Jefferies & Company.

You managed to make it through without coughing.

It was a struggle.

Well done. So it looks like we are starting to inch now towards EBITDA breakeven. Is it safe to say the majority of your facilities are EBITDA positive before the corporate overhead at this point?

Yes, that's a safe assumption.

Okay. And I've read that ProSales has been closing some facilities, and a couple of guys have filed in the Midwest, maybe not as applicable to you guys, but can you talk about what's going on with the competitive environment and what segment specifically guys are showing the most gains?

The landscape is still pretty much as it has been for the past six, nine months. We are continuing to see small operations closing their doors, as well as some of the larger more national companies who were closing specific locations. Either they are doing market consolidation or an abandonment of the market. I think that with this level of housing, with the very, very tight liquidity that most people are operating under, my personal feeling that we are going to see a lot more shutdowns occurring over the next six months. But that's only, I guess, experience talking from my standpoint at this time.

Our markets that are doing well for us, some of them are due to the closedowns that have occurred, and where people have pulled out of markets. But since that is so widespread and generally in all of our markets, we have seen some of this activity, so I can't really attribute markets where we are doing better than others solely to the condition of people pulling out.

We have pockets in Florida that are doing well for us, and as compared to the previous year. And Orlando's certainly, South Florida, Tampa being an example of those markets. Certainly the charlotte market, certain other markets in North Carolina, as well as South Carolina are doing well. Texas, by far and away is performing at a better level than any of our markets. And then we have them scattered -- Baltimore, Washington market, certain markets in Tennessee.

So we are really seeing a mixed bag of improvements that is going throughout our business. And then offsetting, yes there's some markets that are tougher this year than they were last year, but they are very limited fortunately. And we are finding also ways to overcome some of the downturn that has occurred in housing this year versus last year. So that's -- overall, that's the best picture I can give you, Seth.

Seth, just add to that, I had a vendor in, I believe it was last week, the week before maybe, and I asked them, what are you seeing from your customers who are obviously some of our competitors? Are you seeing a lot of guys go out of business? And they just shook their head and they said -- we are seeing more than we have ever seen. And it is mostly a lot of the small guys. But you got to remember is still a very fragmented market. There are still a lot of small guys out there we compete with, and some of them are strong competitors in the markets that they are in.

But I do think we will also continue to see some of the bigger guys shrink their footprints to try to reduce their cash burn. So I think Floyd is right, we will probably -- we will see more and more of this over the next six to 12 months, and I would anticipate that that is going to benefit us.

I appreciate the color there. And it looks like multi-family sort of continues to sort of drive starts at this point. How is the -- I know you guys have talked in the past about trying to get more traction in that space -- how is that going and what is the expectations going forward?

I would say this year it's trending pretty consistent with last year. It is probably about 15% of our revenue. It is a different industry. It's one that you -- it's tough to crack into, and once you do, you have got to do a really good job and earn the respect of the folks you are working for to regain or to get repeat business. So we are holding our own. It has certainly added to our revenue this year, and then I think it will continue to did so.

And as a percentage of our total sales, of the sales make-up, it pretty much has maintained even in the third quarter, which means that it's increasing at a rate consistent with what we are enjoying in the other parts of our business.

So we are still very, very interested in further developing in this area. It is an extremely price competitive market. The labor makes up a big portion of the billings on a job. And we -- one of the things that we insist on is that we won't install any products that we don't sell to the job. And so that cuts us out of a number of jobs that other people might otherwise participate in.

We have just found that we don't want to be a labor company. We are a building materials -- integrated building materials supply company and we think that's the best for our future. So we are very, very pleased with what we are seeing so far, and we intend to continue to develop this side of the business.

Alright, and then if I can just make one last question in here. You guys have been very accurate around your cash flow guidance, and that's much appreciated. I know it is probably too early to tell, but just based, I guess, hypothetically speaking here, assuming a flat housing market -- I know you guys operate under pretty conservative assumptions -- based on your marketshare gains and some of the restructuring efforts you guys have done, what sort of range of cash, cash burn could you maybe look to do in 2012? Just any initial thoughts there.

Seth, I'm not prepared to do that at this time.

Okay. Alright, fair enough. I appreciate it. Good luck guys.

Rob Hansen, Deutsche Bank.

I just had a question. On the multi-family, how does the take per unit look compared to single-family?

Could you repeat that question?

Sure. On multi-family, how does the take per unit compare to single-family?

Our sales per unit?

Yes.

That's not something I have right in front of me, Rob, to be honest with you. I can get back with you on that.

But it is -- our sale potential per unit is obviously less, but with our penetration, it will still be slightly below what we have on an overall basis.

If you want to call me later we can dig into that, if you would like.

Okay. And then you mentioned some of the things you are doing to offset the declines in some of the tougher markets. I just wanted to see if you could give us an idea of some of those actions.

Well, we have talked and linked the last couple of years about the OpEx reductions that we have made. And we've been very aggressive on trying to recruit additional salespeople that can bring a book of business over with them. So I think recently that's probably the biggest strides we have made is trying to grow that top line in spite of a declining housing market.

Okay. And then just -- you had a pretty solid sales performance across-the-board. One the area that kind of stuck out to me was the Other category. I just wanted to try to see what types of things were driving that this quarter. It just looked pretty good in terms of hitting almost like an inflection point.

You are talking about the Other Building Products & Services category?

Yes.

As a percentage of sales of our total mix, it has remained pretty consistent. Most of what goes in there is installed labor revenue related to our installation services. A couple of the other bigger components would be maybe roofing installation and hardware. But I -- it seems to me it has grown in proportion to the other product categories, so it's not really a surprise to me when I look at it.

Okay. Thanks. That's all I have.

Jack Kasprzak, BB&T.

I am just going to ask about sales performance as well, obviously up 20% or so in the quarter is noteworthy to say the least. But it also comes on the heels, you know, with the first half of the year where your sales were kind of flat and housing markets flattened out at a low level, but again, third quarter just sort of snaps higher.

Could you -- is there anything you noticed in the marketplace or saw coming that you could attribute to that sort of difference from what has been going on in the underlying market? And do you think this is a sort of trend that you can at least keep in the fourth quarter?

Well, not to diminish what we have done, because I think we have a very strong quarter, but keep in mind that third quarter last year was right at the end of the tax credit expiring, so that may have been a little bit of an artificially low quarter a year ago.

But even in light of what housing has done and the fact that starts are still down and units under construction are down, we were still able to generate a 20% gain. A lot of it, like I mentioned earlier, is the efforts of our salespeople, some of those being new salespeople, to gain new customers. We continue to add -- gosh, we've added over 400 customers a quarter now for probably five quarters straight. And we have had significant gains with existing customers on increasing our share with them as well.

So I think a lot of it, as Floyd has talked about in the past, points to the builders looking for a stable supplier, a supplier that they know is going to be there. And we are certainly at the top of the list if that's what they're looking for. So we have been able to capture a lot of new customers and gain additional share with existing customers.

Yes, and I think to add to that, with our liquidity, our agility to ensure that we have adequate inventories at all of our locations, we've been able to respond very rapidly to the builders and the demands that the builders have to service their jobs on a very quick basis. And we have able to do it better than most of our competition.

We have also in -- we've been very active in adding salesmen. We have a lot of salesmen working who are working companies are seeing our progress in our markets, and we have been certainly having our share of competitive salesmen trying to get on board with us and bring business with them, and that's also part of what you are seeing reflected.

But we have been steadily increasing our sales per start consistently all during last year, and then through this year on a pretty regular basis. And the -- and so I think our trend, we certainly believe that we can continue the performance that we have been demonstrating this year. That's how we are building and shaping the Company.

I appreciate the comments. That is certainly noteworthy, so thank you very much.

Jeff Matthews, Ram Partners.

Thanks very much. I'm trying to get a sense of your earnings power in the next cycle. And what I would like to know is, if you would assume a construction rate of 800 to 1 million homes, if we go back to that level at some point down the road, where do you get to in your revenues, and what do you think your margins might look like?

Gosh, that's a tough question. There are a lot of variables that play into that. I can say in general I think we are going to be more profitable than we were at the top of the last cycle from an EBITDA percentage.

Is that because of efficiencies that you have done?

That's right. We've -- not only just in response to the downturn, but even before that, the efforts we have made to consolidate functions across the Company and convert all of our locations to one computer system, things that we already had in process, but then add to that the changes that we were forced to make to deal with this downturn, a lot of those are permanent.

Until you are faced with the situation this industry has been faced with, some things seemed impossible, some folks seem irreplaceable. You just find ways to do things that you never thought you could get them done before. And once you are forced to make those changes, you realize, wow, this really does work. And so a lot of these things are permanent that aren't going to come back, so I think we are going to be a more profitable company. Our sales per start are certainly higher now than they have ever been. So I really -- I can't sit here and give you specific numbers, but I can (multiple speakers).

I was just looking for a general sense as to (multiple speakers).

Yes, I did think we will be a more profitable company. We will have more sales per start.

When you say -- okay, now just in terms of on the revenue side, do you get tacked to a previous peak level sales number theoretically, or is there a reason why you couldn't or a reason why you can't?

At 1 million total starts?

Right.

I don't know that we would be able to push through $2 billion in revenue at that level, but we will certainly be higher topline than we were on those same level of starts back in the previous peak.

Because at 1 million starts, you're going to be looking at -- that would be somewhere close to 800,000 single-family, which is still not a healthy market, and certainly nowhere close to what we had back at the peak.

Back at the peak, we were 8%, 8.5% EBITDA. If we can get anywhere near those starts levels that we were seeing back then, I think we can be up close to a 10% EBITDA company.

Great. Thanks very much.

Philip Volpicelli.

Good morning. I was wondering if you could give us a little breakdown in the revenue gains that you had with all of your different components -- different segments? What was volume and what was price? And maybe if you could also talk a little generally about what you are seeing in prices of the materials that you are selling to your customers?

Well, I will answer your first question. Our sales gain, we were up 20.4% for the quarter, about 22% of that was volume. We did have a little bit of an offset due to price deflation, so obviously the majority of those gains were volume. I think Floyd could probably speak a little better to what we are seeing in the competitive landscape as far as pricing right now.

Still a very, very competitive landscape, especially going into the winter months. The price competition even increases normally because with the decrease in building activity, people trying to ensure that they have business to carry them through the winter, and with the lower level of housing starts, this is very, very tough environment.

And the -- hell, we've been operating under a very tough environment now for the last couple of years, so I don't know and I can't say that it's going to be any worse than what we have seen, but it will certainly be every bit as bad as what we have seen.

Okay, understood. And to what extent -- obviously I recognize the capital structure constraints that you have, but to what extent could you add adjacent products, maybe roofing or something like that? Is that something that you have looked at? Is that something that it is feasible to broaden out the product portfolio you're putting through the same distribution channel?

That's something we do look at, but it's just a very tough environment right now, as you pointed out, the capital constraints we -- right now we are handcuffed with our ability to be able to go out and try to invest in a new productline or introduce a new productline, so I don't see that happening in the near term.

And we really -- we have looked at and we continue to look to see what productline might be attractive to us and be an attractive add to our package. But we really haven't seen anything that -- even if we did have the liquidity to invest in a new product line, we really haven't seen anything that really is of interest to us.

That isn't to say something won't come up down the road. But we are continually adding on a small basis certain specialty products or things that our customers demand and are utilizing in their homes. We do a lot of special order business, and that is continually changing and evolving. And what, Chad, probably 10%, 12% of our business is on special order, and so those are always new products coming in. So I guess -- but as far as any major new productline to be added, I don't see us doing that for quite some time.

Okay, great. Thank you very much.

(Operator Instructions). Howard Weinberg, UBS.

I wanted to chat a little bit -- or ask you to chat a little bit about the growth in you starts -- sales per start, and if we look specifically for the South region, where does this normalize? You guys have seen some pretty impressive growth over the last few years. And I know, Floyd, you have talked about in the past, but I think I'm calculating close to $3,500 per start. Where do you feel like you could plateau?

From my standpoint, I don't know. We've never been through something like this before. I think there is still too much capacity out there chasing the starts that are there. And I think as we have already mentioned we're going to continue to see a reduction in capacity, which is going to -- those that are surviving, it's going to play to their favorite. So I don't know to be honest, Howard. I think there's still more to come though; I do think that.

Okay. And then (multiple speakers).

And certainly as we take -- as we continue to increase our marketshare -- and you're going to see that go up -- and a lot of this right now has to do with the fact that we have the ability to service our customers. We have a very, very aggressive salesforce, a salesforce -- and anytime you have a salesforce that is really confident that their company can take care of the needs of their customer, you are going to have salesmen who are going to be more active in going out and adding new accounts and expanding their business. And that's exactly what we are seeing.

Our salesmen right now are not exhibiting any concerns about whether the Company has a staying power and the ability to service the customers. And I think a lot of our growth that's being -- that we are seeing now is because our people really feel good about our future prospects, and they are very aggressive out in the marketplace in terms of expanding the position with current customers as well as adding new customers.

And I really have been very surprised to see the type of performance that we are getting. I knew that we would be doing better, but the people have really -- it has been a very pleasant surprise to see it. And so I don't want to put a number on it because whatever number I put on it, hopefully, it would be on the low side.

Fair enough. The second question I have is -- revolves around your working capital, sort of what we potentially could infer on your view of commodities going forward. I think if I read the press release properly, it's in the $8 million to $10 million reduction in working capital to preserve the liquidity that you talked about.

Because you are going to have to rebuild that in the second quarter, should we be inferring that you are thinking that commodities could continue to do some deflation here? And then if that's the case, what do you think -- how quickly will customers start pushing back asking for price reductions?

Really the reductions I'm talking about are just your normal seasonal reductions. As sales slow obviously our AR comes down, our inventory comes down a little bit. And, yes, it will start to build again next year. So I when referring to that in the release, it was really in no relation to what we think commodity prices might or might not do, it is just normal more seasonal flow of our business. Floyd, I don't know if you have any comments on commodity prices in general and pricing.

Right now commodity prices are at or near their historical lows. I really don't see how the industry can continue to operate at these -- at those pricing levels. It certainly would be very beneficial to us to see an increase in pricing because of the flow-through. Our margins are fairly fixed on commodity items, so we just generate a lot more margin dollars with the higher prices.

Typically in our business, you can expect ramp up and pricing that usually starts towards the end of the year and will continue through the first quarter. That's when builds have a more difficult time getting their log supplies and so forth. And generally speaking, that is a time that some inflation will occur.

If you'll recall back in 2010, we have that huge spike up where the market literally doubled within six weeks because of certain conditions that occurred, and that occurred in April, and by the end of May it was -- it had already fallen back.

I think that we will -- next year, I think that there will be an increase. I think that the commodity, our composite averages will be increasing because I don't think the industry -- the wood products industry can continue to operate at this level of pricing, and they're going to continue to pull out capacity out of the system. The OSP guys have done a better -- and reacted quicker to the pullout of capacity, and the -- and their prices have held up a little bit better than what we have seen on the lumber side, but they are still at extremely low price points.

Thanks very much guys.

(Operator Instructions). Shawn Boyd, Westcliffe Capital Management.

Thanks for taking the question. Just one, if I may.

You will have to speak up please.

Thanks for taking the question and it's just one, if I may. I realize we cannot get into specifics in terms of liquidity, but I would like to ask, given the volatility that we have seen in the financial markets over the past two or three months, can you talk about what options might be more or less sort of at your disposal, and this kind of thinking about the broad realm of possibilities here?

I really can't discuss that right now, Shawn. I wish I could.

Yes. Okay. And going back to liquidity, at this point you are estimating $80 million at year end?

Right.

Okay. And can you just walk us from the $100 million we're at right now to that $80 million? Is that primarily just to draw down the cash for the funds for operations for the quarter?

As I said earlier, I think we will be pretty much cash neutral during the quarter. But, part of that obviously is our working capital coming down, which helps cover the cash that we are going to use. And so as our working capital comes down, obviously our AR and inventory comes down, which lowers our borrowing base. So the main change you're going to see there is our borrowing base dropping as our working capital drops.

Got it. Good enough. Thanks and good luck.

At this time there are no further questions in queue. I'll go ahead and turn the call back over to Mr. Sherman for any closing or additional comments.

Okay, well, we really appreciate everyone listening in today. If you have any further questions, don't hesitate to get Chad a call, and we will do our best to try and answer any questions you might have.

That does conclude today's conference. We thank you for your participation. You may now disconnect.