Builders FirstSource Inc (BLDR) 2012 Q4 法說會逐字稿

Good morning and welcome to the Builders FirstSource fourth-quarter and fiscal-year 2012 earnings conference call. Your host for today's call is Mr. Floyd Sherman, Chief Executive Officer.

At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. Any reproduction of this call in whole or in part is not permitted without prior written authorization of Builders FirstSource. And as a reminder, this conference call is being recorded today, February 22, 2013.

The Company issued a press release after the market closed yesterday. If you do not 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'll turn the call over to Mr. Floyd Sherman.

Thank you and good morning. Welcome to our fourth-quarter and fiscal year 2012 earnings call. Joining me today from our management team is Chad Crow, Senior VP and Chief Financial Officer.

I'll start with a recap of the fourth quarter and fiscal year, and then I'll turn the call over to Chad, who will discuss our financial results in more detail. After my closing comments regarding our outlook, we will take your questions.

Our sales for the fourth quarter of 2012 were $287.6 million, an increase of 49.3% when compared to the fourth quarter of 2011, which helped generate our first quarter of positive operating income since the third quarter of 2007. As a comparison, actual single-family starts in the South region increased 25.6% during the quarter, while single-family units under construction increased 20.2% over the same time period, indicating we're continuing to grow our market share.

For fiscal year 2012, we ended the year with close to $1.1 billion in sales, up 37.4% over fiscal year 2011, and we reported full-year adjusted EBITDA of $6.4 million, a $21.5 million improvement over 2011.

Since 2007, our Company through hard work and sacrifice and with the unwavering support of our shareholders has weathered the worst housing recession in our nation's history. To say I am proud of what our employees have accomplished in recent years would be an extreme understatement.

The housing industry continued to strengthen. Our sales per shift day in the fourth quarter exceeded that of the third quarter, which is highly unusual given the seasonality of our business. And our Q4 adjusted EBITDA of $3.4 million was our strongest quarter of the year. On a sequential quarter basis, we were able to improve our gross margins by 40 basis points, in spite of commodity inflation of over 20% during the current quarter.

From a US single-family housing start perspective, 2012 ended with 534,600 actual starts, up 24.2% over 2011. Although that is still well below the historical average of 1.1 million single-family units per year.

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 $287.6 million compared to $192.7 million for the fourth quarter of 2011, an increase of $94.9 million or 49.3%. Our quarter-over-quarter topline sales growth was driven by an estimated 38% increase in volume and an 11% increase in price. Breaking down our sales by product category, pre-fabricated components were $52.9 million compared to $35.6 million in the fourth quarter of 2011. Windows and doors were up 32% to $62.3 million. Lumber and lumber sheet goods were $96.4 million, an increase of $42.1 million. Our millwork category increased $8.2 million to $28.3 million, and other building products and services increased 34.2% to $47.7 million.

From a sales mix perspective, lumber and lumber sheet goods were 33.5% of total sales, up from 28.2% of total sales in the fourth quarter of 2011 due primarily to commodity price inflation. All other categories were fairly consistent between periods from a mix standpoint.

Our gross margin percentage was 20.2%, down from 20.4%, a 20 basis point decrease. We estimate price negatively impacted gross margins by 120 basis points, largely due to commodity lumber inflation during the quarter relative to fixed customer pricing commitments and was offset by a 100 basis point improvement due to increased sales volume.

On a sequential quarter basis, our gross margin increased from 19.8% to 20.2%, despite another quarter of commodity inflation.

Our selling, general and administrative expenses were $57.8 million, up $10.7 million or 22.8% from the same quarter last year compared to a 49.3% increase in sales. Included as a reduction to SG&A expense, the $600,000 of proceeds from a litigation settlement during the current quarter. As a percentage of sales, the SG&A expense decreased to 20.1% in the current quarter from 24.4% in the same quarter of 2011.

For the fourth quarter of 2012, our salaries and benefit expense, excluding stock compensation expense, was $36.8 million or 12.8% of sales compared to $27.1 million or 14.1% of sales in the fourth quarter of 2011. This increase was primarily related to higher sales commissions and additional staffing needs to service our increased sales volume.

Delivery expense increased $1.38 million as a result of the increased sales volume.

Interest expense was $11 million in the current quarter, an increase of $2.9 million from the fourth quarter of 2011, primarily due to the issuance of our term loan in December of 2011. We recorded $200,000 of income tax expense in the fourth quarter of 2012 compared to $300,000 in the fourth quarter of 2011. We recorded an after-tax non-cash valuation allowance of $3.6 million and $6.5 million in the fourth quarters of 2012 and 2011, respectively, related to our net deferred tax assets. Absent the valuation allowance, the effective tax rate would have been 31.3% and 38% in the fourth quarters of 2012 and 2011, respectively.

As of the end of the year, our gross federal income tax NOL available for carryforward was approximately $237 million.

Loss from continuing operations was $11 million or a $0.12 loss per diluted share compared to a loss of $16.6 million or $0.18 per diluted share in the same quarter last year. Excluding facility closure costs, the litigation settlement, the fair value adjustment for stock warrants and the valuation allowance, our loss from continuing operations was $0.08 per diluted share for the current quarter.

For the fourth quarter of 2011, loss from continuing operations per diluted share was $0.09 when excluding facility closure costs, debt issue costs write-offs, and the fair value adjustment for stock warrants and the tax valuation allowance.

Loss from discontinued operations was $1 million or a $0.01 loss per diluted share compared to a loss of $100,000 for the fourth quarter of 2011. Loss from discontinued operations in the current quarter was primarily related to an adjustment to record held-for-sale real estate at its fair market value. Our net loss for the fourth quarter of 2012 was $12 million or $0.13 per diluted share compared to a loss of $16.7 million or $0.18 per diluted share in the fourth quarter of 2011.

Adjusted EBITDA was $3.4 million, our strongest quarter of the year and represents a $6.7 million improvement when compared to a loss of $3.3 million in the fourth quarter of last year.

We did not experience a seasonal reduction in working capital we had anticipated given the robust sales performance we saw during the last three months of 2012. This strong sales performance, combined with commodity price inflation, resulted in our working capital actually increasing during the quarter by approximately $12 million.

Components of working capital continue to be healthy, however, as our accounts receivable days for the quarter were 36, an indication our portfolio is strong to quite strong. Inventory turns improved to 9.2 turns compared to 8.7 turns for the fourth quarter of 2011, and our accounts receivable days were 30.

Our cash usage for the current quarter was approximately $18.9 million, excluding the net effects of our recently-completed term loan amendment. Of this $18.9 million, $12.2 million was attributable to increased working capital needs and $1.2 million related to capital expenditures. The remaining $5.5 million was used for cash interest, offset somewhat by cash provided from operations.

On December 17, 2012, we amended our $160 million first lien term loan agreement to enhance our liquidity position to support both current and anticipated increases in sales volume. The terms of the amendment, including increasing the principle by $65 million; reducing the minimum cash requirement from $35 million to $15 million; adding a new $15 million letter of credit facility; and increasing the minimum specified collateral value to $225 million, contingent upon maintaining certain levels of qualified cash. These amendments to our term loan increased our year-end liquidity by approximately $80 million.

We ended the year with unrestricted cash of $131.4 million and net liquidity of $116.4 million after giving effect to the $15 million minimum cash requirement contained in our amended term loan agreement.

In addition to the $131.4 million of cash, we have $14 million in restricted cash at December 31, 2012, of which $1.9 million was included in long-term assets. Restricted cash consists of approximately $13 million used to collateralize outstanding LCs and $900,000 used as collateral for other casualty insurance obligations. In conjunction with revisions to our LC facilities made subsequent to year-end, we freed up an additional $13 million of liquidity by eliminating the cash collateral requirement on our outstanding LCs.

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

Thank you, Chad. The momentum we gained in 2012 appears to have carried over into 2013. We believe the housing industry will continue to recover even further in 2013 and that Builders FirstSource is well positioned to take advantage of this recovery.

The recent amendment to our term loan gives us substantial additional liquidity to continue growing our business at an accelerated rate. We look forward to building on what was a very successful 2012.

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

(Operator Instructions). Richard Paget, Imperial Capital.

I wondered if you could talk a little bit more about pricing? Is most of that on the lumber side, or are you getting it across the board?

We are seeing increases just about in all product categories, but by far and away, the most inflationary part of our business is coming from the lumber side.

Okay. And then whether you look at it on revenues per single-family housing starts in the South or just in general, your sales per start has been growing pretty substantially. Is there an upper limit to this, or do you think that fourth-quarter level, you guys can continue to achieve that level?

Well, I think that so long as we continue doing the job of servicing the market, servicing our customers, ensuring that we have adequate inventories to support our sales that we can continue growing our market share and increasing the sales per start.

Okay. Thanks. I'll get back in queue.

Trey Grooms, Stephens.

This is actually [Patrick Kligget] sitting in for Trey this morning.

My first question, with the price of lumber rising so quickly, I'd imagine it can be difficult to pass that price along to end customers in time to recoup that margin, particularly this quarter. That said, how should we think about your ability over time to recapture that margin through price increases, and what level of success you guys are having today, this quarter, Q1, in terms of passing along additional price increases?

That has been the biggest challenge for us the last four or five quarters. It's been like we've been swimming upstream for over a year now. If you look at last year from the beginning of 2012 to the end of 2012, on average, the prices were up over 50%. And so far in the first quarter this year, they are up another 8% to 10%.

So we're obviously getting price increases passed through or we wouldn't even be able to hold our margin flat, much less improve them slightly on a sequential quarter basis. But it's going to continue to be a challenge as long as we're seeing inflation because you're always lagging behind a bit on getting your price increases passed through, and then if prices continue to rise on you, you are constantly chasing that number.

But we are still confident once these prices level off that we're going to -- we'll get caught up on pricing, and we will see margin improvement. But so far this quarter, it's still been a challenge.

But I will have to point out, Chad, in the fourth quarter, we did increase our margins on the commodity side of the business. As slight as it was, it was still, in spite of horrific inflation in the fourth quarter, which exceeded -- was over 20%, we still were able to slightly improve on our margin on the commodity products.

Okay. Thanks for that color. And just a follow-up question, how should we think about working capital needs going forward? You mentioned that they are up $12 million in this most recent quarter, but you also had the substantial improved liquidity. Just want to get your thoughts how we should think about this going forward, given again the continued rise in lumber combined with your strong volume performance?

Well, historically our working capital trends at about 10% of sales. So I would expect whatever incremental sales we can generate this year, that working capital is probably going to grow at about 10%.

Okay. Perfect. Thanks, James.

Robert Kelly, Sidoti.

Congrats on a positive EBIT quarter. It's been a while.

Yes.

A question on --

We feel good about it.

Yes, you guys have done fantastic work. A question on -- you talked about it in the release, the momentum continuing into 2013. It seems like what the public builders are saying, especially for Q4, points to a pretty big percentage increase again in 2013 for single-family construction. But when you talk about momentum spilling into 2013, I mean do you see another year of 25%, 30% unit growth?

I think that could certainly be the case, yes.

Okay. And then as far as not only the builders, your customers are starting to see a volume pickup. They've also been benefiting from higher selling prices. At what point does the pass-through of inflation get a little bit easier for a supplier like yourselves?

Well, two things would certainly help that cause. One would be for the inflation to settle down so we can get caught up. And then second, we are still at a relatively low level of housing starts. And so obviously the more construction activity we can see, that should help lessen the pricing pressure, as well.

Okay. Then just one final one. Part of the issue with margin is inflation, but part of it is, too, the competitive angle, your competitors still pricing to win market share. I mean is that a fair assumption?

Yes, it's still very competitive.

One of the things that you have to look at, especially on the commodity side of the business, everybody views the market in a different way. It's very, very -- when you're having the type of inflation we're having and you're giving longer-term pricing, 60-, 90-day forward pricing, everybody has a different view of where they think that market is going and what their cost structure is going to be and where they did. And it's still a highly competitive market. We still have more supply than there is demand, and I think that is what really is creating the issues that we've had on improving the margins on this side of the business.

I think that we are -- or at least that we would hope that we are going to begin seeing this issue and this problem begin to subside some as -- at these higher levels, you just can't afford to make a mistake. And I think people are going to start getting more cautious and being less aggressive in their pricing in order to prevent that catastrophe from hitting them as they look out and price further and further out.

Right. I mean that is where I was going with this -- $400 lumber on the commodity side; another potentially 30% increase in volume for the industry in 2013 after a big year in 2012. At what point, have you started to see some of the competitive conditions ease? Is that what we should read into the sequential gross margin improvement during Q4?

We are beginning to see some signs of it. We are beginning to hear some certainly some improving pricing conditions in a number of our markets. I think what we're probably going to find -- and I would hope to be able to -- that we will see -- is we're going to see less and less of long-term pricing. 60- and 90-day pricing gets extremely risky under these conditions. And especially on the distribution side, the margins aren't there to really support this type of risk taking. And I would think that many others are going to begin looking at it in the same way we do and begin looking at shorter-term pricing.

One more if I could sneak it in. Has the sequential gross margin improvement -- has that continued in the first couple of weeks of your 1Q?

Yes.

I would say that the margins are looking pretty much like what we saw in the fourth quarter.

Okay. Thank you.

David Williams, Williams Financial Group.

(inaudible question - microphone inaccessible)

Pardon us, Mr. Williams. We can't hear you.

Me can't hear David's question.

I'm sorry, guys. Can you hear me now?

Yes.

Yes.

All right. Very good. Sorry about that. I wanted to ask you a little bit about the SG&A line and what kind of leverage you think may be available as we get to more normalized building starts? And I realize that we are away from that, but what kind of real leverage do you think that you can extract from the SG&A line as we go forward here?

Well, we have taken a lot of costs out of the business, so long-term I think we should be able to leverage our operating expenses pretty well. I've said all along that we would certainly be more fixed than variable up to about $1 billion in revenue. And once we got past $1 billion, which is where we are now, we were certainly going to become more variable, especially on the delivery side of the business.

The long term, I would probably say we'd be in the neighborhood of 50% to 60% variable. And assuming we can get caught up on pricing, I still think that our goal at the Company is to get to somewhere around 13% to 15% EBITDA flow through on incremental sales. That's the goal. It's not going to happen every quarter, but if we're not facing the commodity inflation headwinds and the competitive landscape continues to improve, then that is what we are shooting for.

Great. Thanks. Secondly, I wanted to ask -- I know that we are a ways away from this issue -- but if you think about your loss of pricing today in an escalating environment, do we have the same types of issue maybe in a downward trend in lumber prices? Can you continue to pass your set pricing that you book maybe 60 or 90 days out? Can you continue to get that same pricing going forward if lumber prices were to fall, or is the competitive environment today situated in a way that maybe you would put some downward pressure on your pricing if we saw some trends downwards there?

For the most part, I think we stand by our pricing commitments as do our customers. And so in an environment like that, you could have some customers that want to price shop you, but I think for the most part, they understand you win some, you lose some. And in an environment like that, I think we could be able to hold our pricing and then see some margin improvement.

All right. One more if I could. Have you seen any signs yet that maybe some of the capacity that some of the producers have talked about bringing back on, have you seen any incremental movement maybe in pricing? I know that we are still running high today, but what are your thoughts, maybe as we head into the second and third quarter for pricing?

On the lumber side?

Yes, on the commodity lumber.

I think we are going to continue to look at a very slow increase on the lumber side. OSB there are a couple of mills slated to come onstream late spring, meaning April, May, that I'm not sure that they are really going to hit as quick as everybody would hope to see that production come online, and I really think it will be later summer before we start seeing good board coming out of those mills.

Right now, the OSB on the panel side, they are running at near capacity. So once those mills come on, I think we'll see some more stabilization on the OSB side.

Lumber is -- the mills are -- they are running from everything that we can gather and all the research that we've done would indicate that your mills are running in the high 80s as capacity. And there are no more -- no new mills slated to come on. China is still staying as a regular buyer for the West Coast and West Coast of Canada, as well as the US. That is going to continue. Markets in India are opening up.

So I think we are going to continue to see a very, very tight lumber market all through 2013. And I think there will probably be more upward inflation on lumber than on OSB panels. But both of them we'll be seeing for the next couple of quarters, we're going to be seeing, I think, increased prices.

Thanks so much. Great color there. Good luck, guys, on the Q1.

Thank you.

Okay.

Matthew Dodson, JWest LLC.

Can you guys talk about what you are seeing in the first month of January? Has the trend continued from December? It was your highest sales month as it continued into January and you think you can grow sequentially from the fourth quarter?

Our trend going into January very much the same as what we saw in the fourth quarter.

And then can you help us understand margins going forward? It seems like you guys are doing a better job in getting in front of lumber. Can we expect the same sequential increase of 40 basis points of margin going forward as well, or is that a little too high to bake into our models?

That's a real tough question. A lot of it depends on what the commodity prices do, how high the inflation is that Floyd just discussed and the competitive landscape. I certainly think we can see sequential margin improvement. 40 basis points a quarter, I would say, might be a tad optimistic.

Can you -- excluding lumber, are you able to get in front of the other inflationary prices?

For the most part, yes. A little bit tougher with the component parts, but very definitely we're improving our margins on those products, as well. But there is a lot of lumber relationship, obviously, in wall panels and roof trusses and floor trusses. But we are able -- we're getting cost increases passed on, and we're doing the same on all other products.

And then finally, on the mills business, it seems like that should accelerate from here and that should really help benefit your gross margins. Can you help us understand what you are seeing in that part of the business and, if that does accelerate, how that could help your margins?

What do you mean by mill business?

In the trusses business, I am sorry.

Trusses?

Yes.

Well, that is certainly the product category that has been most impacted there in this downturn, and certainly as construction activity picks up, we feel like those products will be in higher demand, and that product category has the most room for growth and improvement.

And we also feel that that is going to come about from -- because of the labor shortages that are beginning to show up in the installed process, as well as all parts of -- all construction-related aspects.

So as the labor tightens, that means the components of the trusses, panels, become more of a cost factor for the builder, and I think we will be able to continue to move our margins up on those products. And that is what we are anticipating.

And that is a positive mix shift, correct?

Yes.

Yes.

And then one last question on that. Have you seen that -- you said it was hitting most in the downturn, but have you seen that pick up and reaccelerate?

Yes, we are already starting to see that.

And finally, I'm sorry, I do have one more question. With your stock up so much and you have -- we're not going to expect an equity raise up here, are we?

We are constantly evaluating our capital structure and hope sometime in the next year or so to be able to do some refinancing to improve that. Will it include equity or not? It's really hard to say at this point, but I can say right now that that is not on the table.

And then what is the make-whole on the bond this year?

Well, on the term loan, we have a made-whole on the interest through December of 2014. So if we pay them down any time before then, we have to make them whole on the interest. As of year end, the make-whole was about $50 million, which is essentially two years worth of interest.

And it drops about $5 million a quarter.

All right. Congratulations on a great quarter.

Thank you.

(Operator Instructions). Philip Volpicelli, Deutsche Bank.

Actually the last questioner just asked my question. So just to make sure I'm clear, the term loan, there's no premium that you would have to pay. You just simply need to make them whole on that $50 million of interest, and that drops to $5 million a quarter.

That's right. That is two years of interest, so it's really about $6.5 million a quarter it drops, that's correct.

And then the bonds right now, they are currently callable at par.

That is correct.

Okay. Great. Thanks, guys.

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

Okay. We appreciate you joining us today, and if you have any further questions, don't hesitate to call Chad or Marcie Hyder. Thank you.

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