Builders FirstSource Inc (BLDR) 2014 Q1 法說會逐字稿

Good morning and welcome to the Builders FirstSource first quarter 2014 earnings conference call. Your host for today's call is Mr. Floyd Sherman, Chief Executive Officer.

(Operator Instructions)

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, April 25, 2014. 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 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 10K 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 8K filed yesterday, both of which are available on our website. At this time I will turn the call over to Mr. Floyd Sherman. Please go ahead.

Thank you and good morning. Welcome to our first quarter 2014 earnings call. Joining me from our management team is Chad Crow, Senior Vice President and Chief Financial Officer; and Marcie Hyder, Vice President and Controller.

I will start by giving a brief recap of our first quarter and a 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 extreme winter weather that slowed construction activity across our markets, and housing starts that were relatively flat, we successfully grew sales and adjusted EBITDA on a year-over-year basis. Our sales increased 8.2% and adjusted EBITDA increased 59% when compared to the first quarter of 2013. For the same time period, the US Census Bureau reported actual single-family starts for the South region declined slightly by 0.1%.

In addition, commodity deflation had a negative impact on our sales for the quarter. Lumber and lumber sheet goods prices were on average 14% lower compared to a year ago, which we estimate negatively impacted sales for the current quarter by 2% to 3%. From a sales per start perspective, we ended the current quarter with $4,357 per South region single-family start. Up from $4,021 in the first quarter of 2013.

For the record, during the worst of the weather, there were days where we had 75% to 80% of our locations closed. On a company-wide basis, I estimate that we lost 5 to 6 total ship days which equates to about 8% to 9% of our total ship days for the quarter. I believe our employees did a great job managing through the difficult weather conditions, and again delivered strong financial results for the quarter. I will 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 $345.9 million compared to $319.7 million for the first quarter of 2013, an increase of $26.2 million 8.2%. We estimate sales increased 10.5% due to increased sales volume and was offset 2.3% due to decreased market prices for commodity lumber products.

Breaking down our sales by product category, prefabricated components were $70.5 million, up approximately16% from $60.8 million in the first quarter of 2013. Windows and doors were $76.3 million, up 19.9%. Lumber and lumber sheet goods were $115.5 million, down 1.1%, our millwork category was $33.5 million, up approximately 15%, and other building products and services were $50.1 million, up approximately 2%.

From a sales mix perspective, lumber and lumber sheet goods were 33.4% of total sales, down from 36.5% of total sales in the same quarter last year largely due to lower market prices for commodity lumber products. All other product categories were fairly consistent between periods from the mix standpoint, although weighted more towards value-added products versus a year ago.

Our gross margin percentage was 21.7% in the current quarter, up 220 basis points from 19.5% in the same quarter last year. Our gross margin percentage increased largely due to improved customer pricing, as well as less intra-quarter price volatility in the commodity lumber markets in first quarter of 2013. Lumber and lumber sheet goods prices rose sharply during the first quarter of 2013 while prices fell during the first quarter of 2014.

From an SG&A perspective the disruptions caused by a severe winter weather negatively impacted our operational efficiency. Our selling general administrative expenses expressed as a percent of sales increased to 20% in the first quarter of 2014 compared to 19.1% last year. On a sequential quarter basis, total SG&A dollars were flat with the fourth quarter of 2013. For the current quarter, our salary and benefit expense excluding stock compensation expense, was $43.5 million or 12.6% of sales compared to $37.7 million, or 11.8% of sales last year.

Delivery expense increased $1.5 million, and other G&A expenses increased $1 million primarily as a result of increased sales volumes. Interest expense was $8.8 million, a decrease of $3.7 million when compared to the first quarter of 2013 as a result of our second quarter 2013 refinancing.

For the current quarter interest expense included $6.7 million related to our senior secured notes due 2021, a $1.2 million non-cash fair value adjustment related to outstanding stock warrants, and $600,000 of amortized deferred loan costs. Interest expense in the first quarter of 2013 included $6.5 million related to our term loan and $4.5 million related to our floating rate notes due 2016.

In addition, interest expense in the first quarter of 2013 included $400,000 non-cash fair value adjustment related to stock warrants and $600,000 of amortized debt discount. We recorded a $100,000 income tax benefit in the first quarter of 2014 compared to $300,000 of income tax expense in 2013. We recorded an increase in the after-tax non-cash valuation allowance of $1 million and $4.4 million in the first quarters of 2014 and 2013 respectively. Both were related to our net deferred tax assets. Absent the valuation allowance, the effective tax rate would have been 33.1% from 36.3% in 2014 and 2013 respectively.

At the end of the current quarter our gross federal income tax NOL available for carry-forward was approximately $270 million. Loss from continuing operations improved to $3.3 million, or a $0.03 loss per diluted share compared to $11.6 million or $0.12 loss per diluted share in the first quarter of 2013. Excluding the fair value adjustment for stock warrants and the tax valuation allowance, our adjusted loss from continuing operations was $1.1 million, or a $0.01 loss per diluted share, compared to $6.8 million or a $0.07 loss per diluted share in the first quarter of 2013.

Our net loss was $3.4 million, or a $0.03 loss per diluted share for the current quarter compared to $11.8 million, or a $0.12 loss per diluted share, for the first quarter of 2013.

Adjusted EBITDA was $8.6 million or 2.5% of sales for the current quarter, compared to $5.4 million or 1.7% of sales in the first quarter of 2013. We were cash flow positive during the quarter and ended with total liquidity of $223.9 million consisting of $62.8 million of cash $161.1 million of borrowing availability under our revolving credit facility. We had no borrowings during the quarter under our revolver, and no interest payment due on our 2021 notes. Our working capital as a percent of sales remains fairly consistent at 10.5% of sales.

Operating cash flow was positive $13.8 million for the first quarter of 2014, compared to negative $25.2 million for the first quarter of 2013. A difference primarily attributable to our improved financial performance and a reduction in working capital during the first quarter of 2014. Capital expenditures were $5.3 million for the first quarter of 2014 compared to $1 million for the same quarter of same quarter of 2013. I will now turn the call back over to Floyd for his closing comments.

Thank you Chad. Harsh weather disrupted construction activity during the first quarter. We believe the underlying demand for new housing remains strong, and with the weather problems from earlier this year behind us, that the pace of construction should accelerate over the coming months. We also remain confident in our ability to use our scale and market share to continue delivering strong financial results. I will now turn the call over to the operator for Q&A.

(Operator Instructions)

Trey Grooms, Stephens Incorporated.

First off, can you give us maybe a little bit more color on how demand trended as the quarter progressed? I know the weather was an issue obviously, but as the quarter progressed, how demand has looked and then - also how it has been trending in April, if you could give us any color there.

Trey, this is Floyd. January, February were flat. The slight improvement over 2013. March we saw a pretty good uptick and we finished March on a really good note. April, while it is better than it was in March, and better than April of a year ago, it's a little bit short of our expectations of what we were hoping we would see. It's still good but maybe not as strong as we were hoping. We thought we would see a real surge after following the bad weather.

Part of the issue, I think, that we are facing is that maybe we got a little bit the head of ourselves - is that it takes a while for some of the construction sites to dry out, for the dirt it - so you can get back on the building sites. I think that probably has slowed us down a little bit.

We are encouraged with what we see. We would always like to see things stronger, but April we will finish ahead of last April. I think the quarter will probably follow the same trends as what we have seen. I think it looks like housing, instead of a real hockey stick rebound, is probably looking more like a gradual improvement. We are going to outperform the market, and I think we will continue to turn in improved results.

It's safe to say that you are seeing some improvement year-over-year and you said April is better than March.

Yes.

Okay. Is it your expectation though that as things dry out and so forth that you should see May better than April?

I definitely feel that would be the case.

Okay. And then Chad, if you could comment on - given where lumber prices are, where you guys think volume is trending. How should we be thinking about gross margins in the quarter relative to -- of course lumber looks like it might be finding a bottom here. I haven't seen the numbers today yet for this week, but your thoughts on that and how to think about lumber prices and margins will be helpful.

All right. And I will add a bit more color on sales as well. Through today we are trending about 8% to10% over last April. For the current month to date, if that gives you any additional color on what we are seeing currently.

And that is volume, Chad, just to be clear?

No that is just dollars.

That's dollars. And that is on a lumber price environment that is down year-over-year?

That is correct. We see the same lumber numbers that you do. We're all certainly hoping that lumber has found a bottom and will start ticking back up. As we have said before, we like higher lumber prices, it can certainly benefit our EBITDA flow through. Anytime we have a depressed lumber price environment like we have had in the first quarter it does hurt our overall results.

From a margin perspective, really all I can say right now is that through April we are consistent with or are up slightly from our Q1 gross margin. Certainly our margin in Q1 was hurt a little bit by volume. Probably in the neighborhood of 20 basis points or so. So any uptick in volume is going to help. And as we have said in the past, just a healthier building environment in general is going to help. Hopefully we will continue to see the positive trends that we have started seeing in March and April and continue to accelerate through the spring and summer.

Trey, I think some encouraging signs, at least for me, the last couple of days some of the large builders have been giving their first-quarter numbers. For the first time for the last several quarters, as you know, when you look at unit counts, their new contracts were going down - the new sale contracts - the backlog was coming down. Now that seems to have reversed and they all were reporting a nice uptick in new orders and the backlog is growing. That can only be a very positive sign for us as we look down the road.

One last question -- more on -- to get some clarity. Lumber segment was down 1%, year-over-year. You put in the release that on average, I guess it's lumber pricing being down 14%. Is that the read through there, that volume in the segment was up 13%? Is that how to take that, or is there other moving pieces there?

Volume was certainly up but as we've said it was offset certainly by price. So yes, I think that is directionally correct.

Okay. Thanks a lot and great luck. Good luck.

Rob Hansen Deutsche Bank.

Thanks. Floyd, I just wanted to get your thoughts on lumber prices. You have always had a good read into what is going on and where you see them headed from here, in terms of the supply and demand dynamics.

My view on lumber -- I think we, as Chad said earlier, it really feels, Rob, that we have seen the bottom. We have seen a nice improvement on the Southern Yellow Pine especially on the West side. Here in the last week prices have really started moving up, not quite as strong on the East side. SPF -- the market looks like it's really trying to firm up and that is very encouraging. That is the first encouraging signs to me that I have seen.

It looks like the order rate is definitely improving. I don't think any body is starting to jump in and take long positions yet, but they certainly have stepped-up their buying activity. The mills are showing a lot less willingness to back off of their prices and I think that is encouraging. I think that indicates that their order files are getting in much better shape.

One of the issues that you have still is the transportation, railcars out of Canada continue to be a nightmare. The allocations of cars are definitely still going to the agriculture, grain movement, as well as the oil shipments. The lumber guys continually are still confronted with not being able to get cars and not being able to get cars moved anywhere as quickly as they would like.

But I think we are going to start -- we are not going to see a sharp rebound on lumber -- but definitely an improving pricing structure as we go into the summer months. OSB is certainly starting to firm up. It looks like the OSB market is continuing to inch up a couple of bucks at a time per thousand on a weekly basis. I view overall the commodity markets are going to be better than what we have seen, probably not anywhere near at the highs that they got to in the first quarter or the first four months of last year.

That is great color. And we probably shouldn't -- in thinking about it from a quarterly perspective, we probably shouldn't expect much too much of a gross margin hit in terms of your buying and structuring of contracts. Is that a good way to put it as well?

Yes I think so. Chad, do you want to answer that?

No I think in that type of environment prices slowly recovering that should not be a negative to our gross margin.

Okay. And I wanted to see if I could get a little bit of color in terms of the health of the construction market in the South. Single family starts were flat during the quarter. How did true volumes look overall for you guys? And was the outperformance driven by an increase of sales within existing customers? Did you gain share? How did that all look?

Our gain is coming, yes, we have been increasing our share of the wallet with existing customers but we have continued to add new customers at pretty similar rates to what we have been doing in the past. I think for the quarter there were close to 500 unique new customers that we sold to for the first time. That continued to be a very important part of the direction of -- sales direction of our Company. That definitely contributed to our increase in our market share. It's a combination really of both of those factors.

That's all I have for now. Thank you.

Jack Kasprzak, BB&T

Thanks, morning guys. One small question I guess, or small item, shares outstanding or diluted shares in the fourth quarter were about 99,500 and when you reported in the first quarter they were 97,600. Is that just a function of slipping into a small loss from Q4 to Q1?

Yes that is right.

So we go back to a profit in a seasonally stronger period. We should probably use the 99,500 or so for the fully diluted share count?

I think that is right.

Okay. Some of the -- your window sales were strong in the quarter. Some of the window manufacturers that we know have announced price increases, have you guys seen that? Is that a benefit do you think to your window sales in the quarter?

There was some benefit, Jack, we really - the timing of the increase of when it went into effect, that was partially responsible. Overall our window sales again -- we put a lot of emphasis on that product category and I think it is more due to the fact that we continue to take market share and we continue to take business in that category.

I think with our service levels, our competitive pricing and the manufacturers have kept in a competitive position. in the market. So that is I think that's -- those are reasons that have accounted for our gain in window market share percentage.

Our window plant in Houston continues to perform extremely well. The windows we manufacture for Texas.

Right. Great. The press release, your comments on lumber pricing are appreciated Floyd. The press release also mentions improved customer pricing. I think that is something you guys have talked about for a while. Through the downturn. Could you elaborate maybe there? Is it ongoing discipline by you guys or are most people filling up and feeling better overall about the overall pricing environment, in terms of what maybe the competitors are doing? Could you give us color there? It would be appreciated.

We are still seeing, Jack, it's very, very competitive out there. I think everybody went into the first quarter of this year expecting a housing market that was going to be mirroring what we saw in the first quarter, first half of last year. And everybody's expectations for continual improvement in the housing is certainly there.

As a result you begin increasing your output capabilities, and the increase didn't materialize until --(technical difficulty) we have been saying no to a lot of business that before we would have taken but we were just not getting the pricing that we feel that we can live with. And so I think we have been -- (technical difficulty).

Our sales, better margins, and certainly that went for the commodity products as well as other products. I attribute most of the pricing gains to our people being very disciplined and what they are doing in the market and willingness to walk from substandard business. Chad anything you want add?

No I agree. I echo Floyd's comments. Our guys are doing a really nice job of holding the line on pricing and when we need to we will pass on the pricing. I think what Floyd said is dead on.

Thanks very much I appreciate it.

Justin Bergner of Gabelli & Company.

Good morning, Chad, good morning, Floyd.

Good morning.

My first question related to the matter of lag time between housing starts and your activity. One of the major home improvement companies yesterday talked about an increasing lag time between starts and their activity. What are you seeing in your business in terms of that lag?

I would guess it's two to three months. It's probably a little slower in the first quarter due to the weather. But I think we have kind of settled into a two to three month lag.

And that would compared to a sort of normal lag time that is a little bit less than that, or about the same?

That certainly is less of a lag that I would've said a couple of years ago. And probably back at the peak of housing in 2005, 2006 you were probably talking a one to two month lag.

So two to three months is probably a decent number to use going forward?

I think so.

Okay. And do you have an estimate as to -- an internal estimate as to how much weather impacted the dollars per housing start that you may have realized in the first quarter to the extent that there were starts underway, but you just weren't able to do the activity that you wanted to do?

No. I think the best way to calculate that might be to take our average sales per day in the first quarter and based on the five or six days that Floyd said we were closed. It probably would have been, I don't know, another $25 million or so of sales that we may have had without the weather issues. So you could divide that by the number of starts.

That is very helpful. Just finally -- I would certainly be expecting that without the weather your dollars per start would have looked better. Conversely if I look at housing starts on a lag basis, for the growth in dollars per housing start, it doesn't look quite as strong as the 8%. Is that a fair assessment that you observed in your own data?

To be honest I haven't looked at it in that much detail. I can tell you the numbers are going to be skewed in the first quarter. Whether you look at starts or units under construction, the bottom line is activity -- construction activity came to a grinding halt to a large degree in a lot of markets for multiple days. I think it's going to be tough to try to read too much into some of those numbers to be honest with you.

But sort of a clean number without the impact of weather probably would've looked decently better than the plus 8% dollars per start?

Right.

Great. Thanks for the Q and A.

(Operator Instructions)

Matthew Dodson, J West LLC.

Hi Chad. Can you help us understand a little bit better the sequential movement in your gross margins. In the fourth quarter your gross margins were 22.4%, they were 21.7% and you had less of the commodity in the lumber and lumber sheet goods, as a mix. Can you help us understand maybe why that happened and do you think gross margins stay kind of at this level or do they rebound back above 22%?

I think as volume picks up and the construction activity picks up in the coming quarters I would fully expect to see our margins improve. During the first quarter the fall off in volume certainly had a negative impact on our gross margin. As Floyd mentioned there were several days we were closed. And even days -- some days when we were open we were not as productive as we could have been.

Employees were reassigned at times to clear snow off the yard and up the drives and walkways. Builders were holding up shipments - we couldn't ship orders to the job sites due to the weather. So I would fully expect gross margins to improve as we move into the second and third quarter.

Got it. And then can you help me understand a little bit better. You guys did a phenomenal job on SG&A. You're only up about $800,000 sequentially. How do you think about the SG&A dollars going forward sequentially over the next couple of quarters?

It was a rough quarter for us from an efficiency standpoint. Certainly with the disruptions caused by the weather, it made managing our workforce very difficult during the first quarter. Also on a sequential quarter basis, as I have said this time every year, we get hit with additional payroll taxes in the first quarter, compared to the fourth quarter. And then we have to restart our vacation accruals in the first part of the year which we don't have in Q4. Those two items combined was a $3 million delta, Q1 to Q4.

The fact that we were flat on a dollar basis versus Q4 I think we did a pretty dang good job of managing it. Given everything that we were dealing with. Going forward, I fully expect to start driving that operating expense down as a percentage of sales and I still think we will be lower as a percentage of sales than we were last year. It was a difficult quarter to manage it from an efficiency standpoint.

And then just the last question, to get a little clarification again. You said you guys were up about 8% year-over-year in April. You expect an acceleration of that percentage in May and June? Is that right?

We certainly expect volume to accelerate.

But that is from seasonality, right? I mean, May and June go up. I'm just (multiple speakers) --

Sure, yes.

Do you think that year-over-year, do you see an acceleration in the year-over-year percentage?

I think we're all kind of waiting to see. A lot of that will depend on housing activity, that year-over-year comparisons in the commodity lumber prices are going to have an impact as well. I do think we will continue to see sales accelerate but to what degree and how that is going to look on a year-over-year basis, I think we're all just waiting to see.

Great. Thanks Chad, I appreciate it.

Thank you, Matt.

(Operator Instructions)

We have no further questions at this time. I will turn it back over to our speakers for any other remarks.

We appreciate everyone joining the call today. If you have any follow-up questions, please don't hesitate to give either Chad or Marcie a call here in Dallas. Thanks and have a great day.

That does conclude today's conference. Thank you for your participation.