Builders FirstSource Inc (BLDR) 2012 Q2 法說會逐字稿

Good morning and welcome to the Builders FirstSource second-quarter 2012 earnings conference call. Your host for today's call is missed or 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 call is being recorded today July 20, 2012.

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 statement.

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.

Welcome to our second-quarter 2012 earnings call. Joining me today from our management team is Chad Crow, Senior Vice President and Chief Financial Officer. After giving a brief recap of the second quarter, I'll turn the call over to Chad for a more detailed discussion of our financial results. After my closing comments regarding our outlook, we will take your questions.

We delivered our best operating performance in nearly five years, reporting positive adjusted EBITDA of $2.1 million for the second quarter and improving to breakeven adjusted EBITDA June year-to-date. Our second-quarter sales grew 31.7% to $271.9 million compared to sales of $206.4 million for the second quarter of 2011. Over the same time, actual single-family housing starts in the South region increased 21.3% while single-family units under construction increased 1.5%. Our topline growth far exceeded this increase in residential construction activity, indicating we continue to grow market share, and we met our primary goal for the quarter of getting back to positive EBITDA.

Our sales in the current quarter were our highest of any quarter since 2008 and represented our fourth consecutive quarter-over-quarter sales increase of greater than 20%. And our sales per South region single-family start was $3,513, down just slightly from $3,539 in the first quarter of this year.

However, as Chad commented on -- in our earnings release yesterday, it was a challenging quarter for gross margins as the higher-than-expected sales volume, combined with roughly 16% price inflation in lumber and lumber sheet goods during the quarter, forced us to replace inventory during the latter half of the quarter at a higher cost. Given our limited ability to adjust intra-quarter pricing with many of our customers, we experienced gross margin compression on our commodity and lumber sheet good products. On a quarter-over-quarter basis, we estimated this cost to be approximately $4 million to $4.5 million of gross profit dollars and $3.5 million to $4 million of EBITDA.

As we have discussed in the past, an environment of higher stable commodity lumber prices is the optimal environment for us. Unfortunately, as lumber and lumber sheet good prices climb to higher levels, we sometimes have to endure short-term margin pressure along the way. Thus far in the third quarter, commodity lumber and lumber sheet good prices have been relatively stable. If that holds, we would anticipate seeing gross margin improvement in our commodity lumber category.

Let's also not forget it is still a very competitive pricing environment. And in our continuing effort to grow market share and win new business, we will sometimes sacrifice gross margin percentage in order to generate incremental gross margin dollars.

Everyone in the housing industry was dealt a serious blow during this downturn. And the past six years have been very, very difficult. As the housing industry recovers, we must continue our March towards positive cash flow and to get there, we must continue growing our sales and expanding our customer base.

Despite the fact that commodity lumber price has presented some unexpected challenges for us during the quarter, we were still able to achieve our goal of positive EBITDA, thanks largely to our topline sales growth. This was a significant step towards returning to profitability.

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

Thank you Floyd. Good morning everyone.

For the current quarter, we reported sales of $271.9 million compared to $206.4 million for the second quarter of 2011, an increase of $65.5 million or 31.7%. We estimate sales increased approximately 29% due to increased sales volume and 3% due to price.

Breaking down our sales by product category, Prefabricated Components were $51.2 million compared to $40.2 million in the second quarter of 2011. Windows and doors increased approximately 27% to $59.3 million. Lumber and lumber sheet goods were $87.9 million, an increase of 44.8%. Our Millwork category increased $4.8 million to $26.4 million and Other Building Products and Services increased 26.2% to $47.1 million when compared to the same quarter last year.

From a sales mix prospective, lumber and lumber sheet goods were 32.4% of total sales, up from 29.4% of total sales in the second quarter of 2011, due primarily to increased volume which is indicative of more homes being in the early phase of the construction process. All other categories were fairly consistent between periods from a mix standpoint.

Our gross margin percentage was 19.7%, down from 20.7% in the second quarter of 2011. The 100 basis point decline was, as Floyd mentioned, primarily attributable to commodity lumber inflation. We estimate gross margin decreased 170 basis points due to commodity lumber inflation relative to customer pricing but was offset somewhat by a 70 basis point improvement due to increased sales volume.

Selling, general and administrative expenses were $55 million for the current quarter. This is up only $6 million or 12.2% from the same quarter last year despite a 31.7% increase in sales. As a percentage of sales, SG&A expense decreased to 20.2% in the current quarter from 23.7% in the same quarter last year.

In the current quarter, our salaries and benefits expense, excluding stock comp, was $34 million, or 12.5% of sales, compared to $28 million or 13.6% of sales in the second quarter of 2011. The $6 million increase is primarily related to higher sales commissions and additional staffing needs to service the increased sales volume.

We recorded $100,000 of facility closure costs during the second quarter of 2012. During the second quarter of 2011, we recorded $1.9 million of facility closure costs primarily related to the closure of a distribution facility in Georgia.

Interest expense was $10.5 million in the current quarter, an increase of $4.8 million from 2011. This increase was primarily due to interest associated with our new term loan combined with a $600,000 non-cash fair value adjustment related to stock warrants issued in connection with the term loan. These increases were partially offset by the expiration of our interest rate swaps during the second quarter of last year.

We recorded $144,000 of income tax expense in the second quarter of 2012 compared to $1.7 million in the second quarter 2011. We recorded an after-tax non-cash valuation allowance of $4.3 million and $6.8 million in the second quarters of 2012 and 2011 respectively. These related to our net deferred tax assets. Absent the valuation allowance, the effective tax rate would have been 34.9% and 37.5% in 2012 and 2011 respectively. As of the end of the quarter, our gross federal income tax NOL available for carry-forward was $212.3 million.

Our loss from continuing operations in the current quarter was $12 million or a $0.13 loss per diluted share compared to a loss of $15.4 million or $0.16 per diluted share in the same quarter last year. Excluding the fair value adjustment for stock warrants, facility closure costs and the tax valuation allowance, our loss from continuing operations was $0.07 per diluted share in the current quarter. For the same quarter of 2011, our loss from continuing operations was $0.08 per diluted share, excluding facility closure costs and the tax valuation allowance.

Adjusted EBITDA was $2.1 million in the second quarter of 2012 and represents a $3.4 million improvement when compared to a loss of $1.3 million in the same quarter last year. We continue to manage our working capital efficiently as our working capital expressed as a percentage of sales was a healthy 9.2%, consistent with 9.1% for the second quarter of 2011.

Our inventory turns improved to 9.9 turns compared to 9.3 turns for the same quarter last year. Our Accounts Receivable and Accounts Payable days held steady at 34 and 30 days respectively.

Our cash used for the current quarter was $24.5 million. Of this amount, $15.4 million was due to an increase in working capital and $2.2 million related to capital expenditures. The remaining $6.9 million was cash used in operations and for cash interest.

We ended the quarter with cash of $105.1 million and net liquidity of $70.1 million after giving effect to the $35 million minimum cash requirement contained in our term loan agreement. As of the end of June, our liquidity was in line with expectations and our cash usage for fiscal 2012 is still expected to be in the range of $45 million to $55 million.

In addition to the $105.1 million of cash, we also had $14.4 million of restricted cash at June 30, 2012, of which $1.8 million was included in long-term assets. Restricted cash consists of $13.5 million used to collateralize letters of credit outstanding under our letter of credit facility, and $900,000 used as collateral for other casualty insurance obligations.

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

Thanks Chad. We were very pleased with our results for the second quarter. We made significant strides during the first half of 2012, a result of our employees' efforts over the past several years positioning the Company to take advantage of the improved housing environment we are finally seeing. We believe we'll be able to continue -- we'll continue to see housing gradually recover, which should drive further financial improvements in our business. Throughout this downturn, we have not wavered from our commitment to grow market share, improve operating efficiencies, and conserve capital. It is extremely gratifying to see the hard work and dedication of all of our employees translating to improved financial results.

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

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

Thanks, good morning guys. With regard to the higher prices of lumber, do you guys expect that you'll be able to pass those along ultimately to the customers, given that the environment is still somewhat competitive?

I think, Jack, I really think we will be able to do that. We initially were able to pass on increases from the -- going from the first quarter into the second quarter. We've also put out increased pricing in the third quarter. What really caught us in the second quarter was that we overshot our budgets in terms of the sales. We really didn't think that we would produce the sales, the revenue that we did, and that caused us to go in and do replacements while the market was on a spike-up. It since has fallen back. It's now looking like it's stabilizing, and I think we will continue to be able to put legitimate increases through, and we'll be able to get those increases.

Okay. You were referring to the price of lumber when you said stabilizing, I assume.

Yes, lumber and lumber sheet goods, yes.

Okay. The macro statistics on housing, homebuilder sentiment index, housing starts, housing permits, if anything, in the last month or so, have gained momentum, I would say. Your sales performance has obviously been very good for a few quarters here in a row but are you seeing that on the ground in your business now? Two units under construction have turned positive. Single-family have turned positive. So despite very good sales performance so far, it seems like it's early on with the market building momentum. Is there any reason to think we can't continue to see this kind of robust growth?

No, I think that we'll be able to continue that growth. The only thing that possibly could cause us to pull back other than a major fall-back in construction activity is if we saw that we were unable to pass on legitimate cost increases. That would cause us to say the margins were unacceptable and would just not be profitable business for us. But I really don't anticipate that taking place, and right now, we definitely are still continuing to see very much improving construction activity out there.

Jack, you make a good point. We've been very pleased with our sales the last few quarters, and that's been primarily when you look at the statistics driven by starts. We just now this past month all units under construction turned the corner and start improving. So that gives us even more to look forward to I think as these starts begin to turn into units under construction. So, I think you make a good point there, that we are still on the front end of what we feel like is a wave of construction coming through.

Yes, front end, okay. Great, thanks guys. That does it for me.

Seth Yeager, Jefferies & Co.

good morning guys, good quarter. So just following up on Jack's question, as far as the growth and starts versus units under construction, is it fair to say that maybe over the next couple of quarters we will start to see a mix shift away from the lumber and lumber sheet goods and more towards some of the other products, or is that not -- you don't really expect that to be the case at this point?

No, I think the -- we should see the rest of the product lines following the lumber and lumber sheet good sales. And so I think that will be an improving part of the mix in our business. But typically, the lumber and lumber sheet goods are what you're going to see in a trend, an improving trend, of the housing activity. If the housing activity stays as robust as what we've seen up to this point, then I think you're going to see, until it stabilizes, still a little bit heavier tilt towards the lumber and lumber sheet goods category.

If we keep seeing starts like we've seen recently, the units under construction will continue to lag a little bit. Then you've also got to factor in commodity lumber inflation. If that continues, then that obviously can impact your mix as well. But you're right. If we are starting houses, eventually the other products have to follow.

Typically as we go into the winter months, you will see then the housing activity start slowing down, and then as you're finishing the house out, closing it in, you'll see then a pickup in the mix of the other products.

Thanks, appreciate it. I think, in the last couple of quarters, you've said that you've noticed a bit of a more elongated lag between homebuilders breaking ground and actually waiting to see before they actually start construction. Is that starting -- is that lag starting to compress a bit?

Yes. We are seeing that starting to take place now.

Okay, that's helpful. And then I get the sense you guys are continuing to grab share. Can you maybe provide the number of new customers that you guys added and just maybe talk a little bit about trends in the Carolinas versus Florida and Texas? I know you added some capacity to your windows. In Texas, it seems like a pretty strong market. If you could maybe give some additional detail on that?

Yes. In the second quarter, it was a record quarter for us as far as new customers opened there. And that also produced the record sales for new customers in the quarter. So, we are still seeing a very healthy trend as we are adding new customers, and those customers are producing meaningful dollars for us. So, it's a good trend going for us.

And from a market standpoint, you're right. Texas has still been very strong for us, and really if you look at a quarter-over-quarter sales perspective, most of Florida has shown some really nice improvements for us as well. And then you've got pockets of the Carolinas that are really strong and you've got other pockets that aren't as strong.

I will have to say, we are seeing indications for the first time that some of the builders are actually starting to put in spec inventory, or trying to get spec inventory on the ground.

Okay. That's helpful. Then just the last question if I can. At what point -- you mentioned maybe pulling back a little bit on sales growth to maintain margins. How do we think about when you guys start to lay off the accelerator on the topline? And then, just as far as going forward, thoughts around concern on the liquidity front as far as financing of working capital to sort of continue to fund that topline growth? How should we think about that?

We have indicated in the past that our goal and the next step is to get cash flow breakeven. In order for us to get cash flow breakeven with our current penetration, it's going to be somewhere in the $1.250 billion to $1.3 billion in topline to generate the type of results, financial results, that we need. So we are going to continue driving our sales. We obviously have to be very, very conscious of the margins, and I think we have been and will continue to be. But you know, our -- we need to get to cash flow breakeven, and it's going to take sales dollars to do it, and that's how we're going to be directing the Company.

Is there -- sorry, go ahead.

If we keep our -- like you say, our foot on the accelerator and continue to grow sales, you're right. That's going to chew up more cash and working capital. And you've seen in the last week or two, there's been a lot of money coming into home-building with some of the refinancings we've seen with the homebuilders. So, we are just constantly striving for EBITDA improvement and we just keep evaluating our liquidity and what options might be out there, but I really feel like, if we can continue to show the financial improvement that we have, that there will be opportunities come along.

Perfect, thanks a lot. Good luck guys.

Howard Weinberg, UBS.

Thank you guys. I wanted to go back to the inventory question, and try to understand what you felt was an appropriate level and are you going into the third quarter with an appropriate level of inventory, given what you expect for sales in the third quarter.

As far as going into the third quarter, again we have tried to estimate what our requirements are going to be to serve the business that we see in front of us, or feel will be in front of us. We're in that position, that right now we've covered 75% of what we feel the need will be, and will always -- we never cover 100% because we always feel there is opportunities to take advantage of certain situations that may arise. And that's -- we are in what we think is a good position for the third quarter. Only time will tell. I certainly am not going to tell our people to slow down their selling efforts, but we will be monitoring it very closely, and we will do what we have to do to ensure that we have the inventory to back up our commitments.

Regarding the 75% number, is that similar to what you had going into the second quarter, is that sales exceeded compounded by the fact that the price of lumber went up so rapidly on you?

We weren't able to really get as much coverage as what we have right now, and we really missed estimating what our sales were going to be. So it was a combination of the two. I would say more of it was driven by our underestimation of the topline growth that we got.

And just on the last question on this topic, to the extent that lumber prices were to fall over the next several quarters, and given your inventory level, how are your contracts set up that you would be able to protect your margin in that event?

Typically, most of our contracts are either 60-day or 90-day forward pricing. Most of the them have a 30-day tail so that you're really, in effect, covering 120 days or 90 days, whatever the situation may be. So that's what our inventories are designed to cover, and so then we -- then on a repricing at the end of a quarter, then it will take into account whatever the -- whatever the market costs look like at that time for the lumber, lumber sheet good products. So, it's -- we don't get -- on a downturn, we don't really get hurt because most in -- very, very rarely have we had it to where people don't honor the commitments that they have with us. So, we don't really have much downside risk in the inventory.

Great. That's helpful. And then on the -- I just want to switch over to liquidity. Chad, I think you talked about $45 million to $55 million of usage for fiscal 2012. Year-to-date I think cash is down about to $42 million. Should we be implying for the rest of the year that you're going to be call it negative $3 million to negative $13 million for the rest of the year? Is that the right way to think about guidance?

That's correct.

And then just finally on the CapEx spending done on the window facility, how much additional CapEx is going to be needed to bring that up to meet demand?

At the window plant?

Yes.

We've pretty much made that investment already.

Right.

Great, good luck guys. Thank you.

(Operator Instructions). Philip Volpicelli, Deutsche Bank.

Good morning. My first question is regarding contribution margins. If you guys the $4 million that you say got hit on EBITDA from the higher lumber prices, that gets you to a change year-over-year of about 11% contribution margin in terms of your growth over $65 million of revenue. As we move forward, how much faster, or how much higher does that contribution margin get as you near that $1.25 billion to $1.3 billion target that you guys suggest gets you to free cash flow breakeven?

You're right. Adding back -- obviously your math is right. And then another thing that we struggled with this quarter was just the rapid ramp up in sales volume and our increase in overtime and use of temp labor. So had we been able to control that a little better and anticipate a little better, that contribution margin I think would've been more in the 12% to 15% range.

Long-term, a lot of it will depend on how well we are able to increase gross margins, obviously, and if we can get commodity inflation and pass along those price increases, we get incremental flow-through there as well. Long-term, I would love to be 15% to 20% EBITDA flow-through, and I think we can if everything falls right for us in a particular quarter. Obviously some things didn't go our way this quarter. But I think, over the long haul, I think anywhere from 15% to 20% is our goal.

Got you. And as you get closer to that $1.25 billion to $1.3 billion, that conclusion margin should accelerate, right? Because you've got more volume going through what should be a relatively fixed cost base?

Yes. You'll obviously have some variable components to delivery as volumes grow, but yes, I would anticipate that we get additional gross margin. Commodity inflation always helps, so yes. I would agree with that statement.

Okay. And then with regard to the facility, that $35 million availability block, have you had any discussions with the lender there on whether or not you can reduce that number, and why was it set at $35 million? Can you give us some context as to why it was set there?

We have not had any discussions to this point, and I think the block, from their standpoint, was just to make sure -- if we get down close to the block, it triggers some additional reporting requirements that we have to do to hybrids. And I think it's just to the point where they just want to be closer to the business, and just making sure that obviously their assets are protected.

All right. I guess one last question. What target EBITDA margin -- if I do the math to get the $50 million, which is roughly your breakeven at $1.25 billion to $1.3 billion, it's roughly a 4% EBITDA margin, which historically you guys have been able to achieve that pretty easily. What margin are you targeting kind of let's say a year out?

Gosh, that's -- there's a lot of variables that go into that question.

Do you think you can get back to the 6%, 7% you had in the boom years, or is that reflective of what it was at boom?

Can we get back to that in a year?

No, over time.

Absolutely. We -- back at the peak, we were 8%, 8.5%.

With the permanent costs we've taken out of the business.

We should do better than that long-term.

We will be better than that.

Okay. And -- okay. I guess there's too many variables to kind of go through it, but I appreciate the information. Thank you.

Shawn Boyd, Westcliff Capital Management.

Good morning gentlemen. Just a couple, and I think I'm coming back to the same topic but maybe coming at it from a different way. If I heard you correctly, the year-over-year change in gross margin was actually a little bit worse than the drop, because we had scale that gave us about 80 BPS to the positive.

Right.

So, if we hadn't had the issues on lumber pricing, our gross margin would have been around 21.5%?

That's correct.

And of course that's kind of a theoretical exercise, but the scale is definitely kicking in. So, to your other comment about so far in the quarter, the prices have been stable and that allowed you to improve gross margins in the quarter. Does that mean that we -- on a year-over-year basis, you're not seeing any impact so far in the quarter?

Well, as Floyd mentioned earlier, we do have, in a lot of cases, a 30-day tail on the pricing commitment. So said another way, if builders had submitted a PO prior to quarter end, then we have a 30-day grace period to carry over that pricing. So to sit here and tell you thus far through July, we are not seeing an impact would be incorrect because we still have some of that tail coming through.

But to answer the question a little more broadly, yes. We should see margin improvement this quarter, assuming a stable commodity environment.

Okay. Just last thing on the gross margin, again, barring any issues such as we had in this quarter, can we target a particular gross margin or a particular level of revenues? So going back to that $1.25 billion to $1.3 billion hit cash flow breakeven, is that a 22% gross margin, 23%? How do you look at that?

I would say you are in the ballpark, yes. I'm not going to get into forecasting gross margin; there's just too many components. But yes, you're in the ballpark I think.

Okay. Last one for me is on the SG&A, that being up the last two quarters year-over-year. We've talked about that having I think it's about a 35% variable component, and so I am at the point of just trying to grow that at sort of 35% of the overall revenue growth rate. Is there anything coming down the pike that would change that, any sort of expansion or contraction that would step change it so that (multiple speakers)?

I think I have said that up to about a $1 billion in revenue, we should be about 35% variable. Once we blow past $1 billion in revenue, we will become more variable. We've got to start adding fleet, we've got to start adding drivers, to keep up with the incremental volume. So I think once we get past $1 billion in revenue, you will see that migrate down closer to a 50-50 split.

Okay. Okay. Good enough. Thank you.

Rob Hansen, Deutsche Bank.

Hey guys, thanks. I just wanted to see -- you mentioned you had a record number of new customers. I just wanted to see what that number was, and then how many -- how much of that was related to the two new market entrances that you had over the past couple of quarters. And also what percentages -- how much sales have you gotten in the last quarter from those two markets?

I am not going to start giving sales dollars by the new markets. I think we've stayed away from that.

One of them certainly has had more meaningful numbers. The other one hadn't even really opened until well into July. So, it would be -- that number would be -- wouldn't mean anything.

As far as the number of new accounts that we opened, 562. If -- and they are unique, new customers for us. The new location in Austin, Texas certainly was part of that number, a very small piece of that, because we were already selling a certain amount of product into Austin, and they picked up part of that business, so that -- they had a less than -- probably not much more than 5% of that total.

Okay. And then you mentioned that sales generally exceeded your own kind of internal forecasts. What parts of the country were -- exceeded your forecasts?

Texas. Florida. Baltimore, Washington.

Okay. And just one last one was you've kind of talked about this in the past. I wanted to see if you could remind us, kind of refresh us in terms of the permanent costs you've taken out of the business that should help you going forward.

We estimate that to be $20 million to $25 million annually.

All right, thank you very much.

At this time, there appears to be no further questions. Mr. Sherman, I'll turn the call back over to you for closing comments.

All right. We appreciate everyone's participating on the call today. Any questions that you may have that you would like to follow-up on from what you've heard today, don't hesitate to give Chad a call. That will conclude our presentation for today.

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