Bluelinx Holdings Inc (BXC) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the BlueLinx first quarter conference call. (OPERATOR INSTRUCTIONS). I will now turn the call over to James Storey, Vice President Investor Relations. Please go ahead.

Welcome everyone to the BlueLinx first quarter 2006 earnings conference call. With us this morning are Steve Macadam, Chief Executive Officer, George Judd, President and Chief Operating Officer, and David Morris, Chief Financial Officer. The press release was issued earlier this morning. For those of you who do not have a copy, it is available in the Investor Relations section of the Company's website, www.bluelinxco.com. Before starting the call I am going to read the Safe Harbor statement.

I would like remind everyone that on today's call management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including all statements concerning future or unexpected events or results. Actual results could differ materially from those projected in the Company's forward-looking statements due to known and unknown risks and uncertainties, including among other factors, the risks and uncertainties described in the Risk Factors section in the Company's annual report on Form 10-K for the year ended December 31, 2005, and in its periodic reports filed with the Securities and Exchange Commission.

Given these risks and uncertainties, management cautions you not to place undue reliance on forward-looking statements. BlueLinx undertakes no obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise, except as required by law.

With that requirement completed, I would like to remind our listeners that we have posted slides on our website that we'll be referring to during this call. We encourage you to view them during our remarks. Additionally, the slide package contains an appendix of supplementary tables available for your review.

Now let me turn the call over to our Chief Executive Officer, Steve Macadam.

Thank you, Jim, and thank you to everyone for joining us this morning for the BlueLinx first quarter earnings conference call. I will start the call by briefly discussing the highlights of our first quarter performance and our growth strategies. Then I will hand the call over to George Judd, who will walk you through the quarter from an operation's perspective. David Morris will then provide the financial review for the quarter. And I will add some final perspective before opening the call your questions. Let's begin.

BlueLinx delivered a solid financial performance for the first quarter of 2006 as we continue to make strides growing our specialty products business, and as we continue to effectively manage our structural products business. First quarter net income rose 16% on a 2% increase in revenue from a year ago. Per share net income increased 14% to $0.32 a share, and overall gross margin improved to 9.4% from 8.8% last year. We achieved these results in an environment that included support from milder than normal weather early in the quarter, but also the unfavorable impact of generally declining structural product prices and the wait and see posture being adopted across the supply chain in anticipation of the widely forecast housing slowdown.

BlueLinx' performance demonstrates continued progress against our three key strategic objectives. These objectives have not changed. They are consistent and constant. First, our primary objective is to grow specialty products to more than 60% of our product mix. Specialty unit volume in the first quarter increased 14.9% from the same period last year, and specialty represented 42% of sales compared with 37% a year ago.

Our second objective is to continue to grow our structural products business, but with an emphasis on profitability and limited exposure to commodity price volatility. During the first quarter overall structural product prices declined approximately 7% from their levels at the end of 2005. In this environment we maintained structural gross margin at 6.8%, down 0.2% from a year ago, while unit volume declined 0.8%. We believe we managed our structural business well in this environment.

Our third objective remains to outgrow the market over time, measured in unit volume growth. In the first quarter BlueLinx' unit volume growth totaled 5% compared with an estimated growth of 2.6% for the overall markets we serve. Supporting these main objectives has been our ongoing commitment to ensure that the people and processes are in place to facilitate our future growth as a market leader in specialty building products. Since our previous conference call in February, we have strengthened our marketing team, appointed key managers to facilitate growth in our Western region, and added both production procurement experts to our supply chain team. These investments in people are intended to help us continue accelerating the achievement of our strategic goals.

Let me elaborate further on these strategic objectives. As we have consistently said, our primary strategic objective remains to grow specialty building products revenue to more than 60% of total sales. Specialty products accounted for 42% of sales in the first quarter, but 62% of total gross margin.

Our emphasis on specialty growth is based on two fundamental factors. First, specialty building products generally or less volatile and carry higher margin than structural products, which translates to more stable earnings growth and higher profit margins. Second, specialty products fit squarely in the sweet spot of our value proposition. Distributing specialty products requires a strong capability to deliver just in time, as well as a high touch solutions-based service culture. Things that we do exceptionally well. We also possesses the ability to execute a national distribution campaign from a centralized platform, drawing on our 1,000 person sales force.

The specialty product growth strategic objective has four key components. The first is working with manufacturers to introduce new products. The example we have talked about in the past is our partnership with Louisiana Pacific to nationally distribute their WeatherBest composite decking product. In a few minutes George will provide an update on the very positive progress we're making with Louisiana Pacific and with other new product rollouts.

The second component of our strategy is to further penetrate new geographic markets. We're taking product categories that we're selling well in one part of the country and introducing them into other parts of the country. For example, we are currently pursuing a number of opportunities in our Western region with productlines that have proven to be successful in Eastern markets.

Third, we are focused on a deeper penetration of under represented market segments. We are actively executing a market by market initiative to grow our presence in the industrial segment. We define industrials as customers who use building products in their manufacturing process. These include cabinet shops, furniture and fixtures manufacturers, wood container and pallet makers, and concrete product manufacturers. This category is attractive because it is heavily skewed toward specialty products. While it already represents 22% of our end markets, we have only about a 3% market share. So we have a great opportunity to grow.

Due to our history of being part of a large manufacturing company, our organization did not focused on numbers two and three of this strategy, geographic expansion and industrial segment growth, in the past because it did not make sense as an arm of a manufacturer. Now these are areas of opportunity that we believe are major initiatives that fit nicely in with our rapid evolution as a specialty products distribution company. This is important to put this evolution in perspective. Just less than two years ago we were primarily a commodity focused, volume oriented distribution arm of a manufacturer. Today as an independent company we are aggressively and systematically pursuing new opportunities as a customer focused, solutions driven value-added distribution partner. We believe we are unique and well positioned to increase our market penetration, both geographically and in the industrial market segment.

Finally, the fourth component of our specialty growth strategy is acquisitions. Our industry is highly fragmented and ripe for consolidation. We actively look for partners who will add value to our franchise, but we also will continue to proceed as a patient and disciplined acquirer. Our plan to grow specialty product sales includes new products, existing products in new geographic markets, more penetration of the industrial segment, and acquisitions.

Now let's look at the structural products part of our business. Our structural products business is a vital part of BlueLinx, and we continue to refine our systems and processes to manage this business for long-term profitability. Over the past several months we have demonstrated our ability to effectively manage inventories in the volatile pricing environment that characterized last year's third and fourth quarters, as well as the generally weak pricing environment of the first quarter of 2006. We have focused on reducing our exposure to the volatility inherent in structural commodity prices through more effective inventory management, increased program sales, greater dependence on the direct channel, and use of consignment inventory.

In summary, our growth objectives and our strategy for reaching them are clear and consistent. Our progress is steady, and our sense of urgency is great. I will talk more about the outlook for the rest of the year later in the call. Now I would like to turn the call over to George Judd, our Chief Operating Officer, who will discuss our quarter in more detail.

Good morning everyone. I will review our operational performance for the quarter. In general we executed well. We focused on the growth of our specialty business and effective management of our structural business. We operated in a business climate characterized by generally weakening structural prices and expectations of a housing slowdown. We were prepared for this environment and managed our business accordingly.

For those following along with the slides, I will begin on side 7, which shows that our overall unit volume growth for the trailing 12 months ended April 1, 2006 was 4.3% compared with 4.1% for the market we serve. As you can see on slide 8, unit volume growth for the quarter was 5% compared with estimated end use market growth of 2.6%.

The quarter's unit volume growth was driven by a 14.9% increase in specialty, which offset a unit decline of less than 1% in structural. Growth of specialty into a significantly larger portion of our overall business is a key strategic objective of BlueLinx. The 14.9% unit volume growth shows that we continue to successfully execute against this initiative in the quarter. The growth was driven by several product categories, including engineered lumber, installation, particle board, vinyl siding and specialty lumber.

Turning to sales revenue on slide 9, specialty sales were the growth catalyst for the quarter, climbing nearly 16%, or $79 million from a year ago, and driven largely by unit volume growth. Specialty sales represented 42% of total sales for the quarter. Structural product sales revenue decreased 5.6% for the quarter. Most of the structural decrease was due to price declines.

Gross margins tell the same story on slide 10. Specialty product gross profit increased by about $17 million to 80.4 million, helping drive total gross profit margins up 60 basis points from the same period a year ago to 9.4%. The specialty margin improvement reflects robust unit volume growth, as well as our ongoing focus to improve procurement and product management processes. In structural products we produced a 6.8% gross margin for the quarter. This was down 20 basis points from the same period last year, primarily due to the generally declining price levels.

On slide 11, our overall inventory position for the quarter reflects a 3% reduction from a year ago level, but an increase of about 6% from the fourth quarter. We believe this demonstrates more effective inventory management year-over-year, evidenced in improving net income and revenue with lower overall inventory dollars. Also, average on hand turn dates improved to 47 from 49 a year ago.

Specialty product inventories increased from both the previous quarter and year ago levels, reflecting higher specialty sales levels from a year ago in preparation for the summer sales season. In structural, dollar inventories increased slightly on a seasonal basis relative to the fourth quarter. But we were down 17% from the first quarter last year, reflecting both lower prices and our ongoing strategy to mitigate negative pricing pressure in a volatile or declining pricing environment. As a reminder a breakout of OSB, plywoods, lumber and rebar inventory is provided in the appendix, as is the slide showing OSB, plywood and lumber price trends for the first quarter through Friday April 28.

Looking at the other key indicators on slide 12, we maintained good working capital velocity in the first quarter, with total working capital turn days at 40 compared with 43 for the same period a year ago. On a trailing 12 month basis, working capital turn days were 40, unchanged from a year ago.

As for logistics productivity, excluding fuel cost, we achieved a 1.7% reduction in first quarter delivery cost per unit load equivalent compared with a year ago. While material handling cost per ULE increased 2.7%. As I noted on last quarter's conference call, in 2005 we introduced a focused improvement initiative into our warehouses, supported by a logistics performance tool that allows each branch to pinpoint areas for potential improvement. We believe that this system will help us to improve productivity by providing essential information for making more timely business decisions relative to local market conditions.

As we moved forward this year, we will continue to focus on gross margin improvement by increasing the mix of specialty, and effectively managing structural. As our first quarter results demonstrate, we're making good progress. We improved first quarter gross margin by 60 basis points over the same period a year ago, largely by growing specialty product unit volume and effectively manage our structural products business.

Looking at structural, our tactical strategy in a weak pricing environment is to tightly manage warehouse inventories and only increased positions when we believe the downside risk is limited and the near-term market opportunity is highly likely.

We continued to adhere to this strategy in the first quarter, keeping lumber and plywood inventories lean, and running OSB through our direct channel. The result is that we were able to service our structural business with substantially lower warehouse inventories, relative to a year ago.

Among our other initiatives outlined on slide 13, as Steve mentioned, we're continuing to invest in people and processes that we believe will support the long-term growth of our Company. We continue to focus efforts on targeted growing accounts that serve high attractive, high-growth markets. We are executing on plans to further penetrate under represented segments like industrials. And we are expanding relationships with existing vendors whose business needs align well with our value proposition.

In April we announced a new agreement with Louisiana Pacific to begin distributing its SmartSide siding, soffit and trim products. We believe this new distribution agreement demonstrates the confidence LP has in BlueLinx, based on the progress we're making with LP's WeatherBest composite decking products. The rollout of SmartSide will start regionally and is expected to build over time. We are very encouraged by this opportunity.

Our process for choosing new products is rigorous and systematic. We are working with a number of manufactures to develop a portfolio of new products that we believe offer us the best opportunity in the marketplace, can command attractive margins, and that can be rolled out in an orderly manner that fully leverages the power of BlueLinx' 1,000 person sales force.

Before turning the call over to David, let me briefly review the current business environment. Business activity is good in most markets. A few markets, such as areas of the Midwest and northern California, have shown signs of softening in housing starts. California has been affected by a very wet winter and spring. The business environment is consistent with our expectations of a slowdown in housing from 2005 levels. It also is consistent with our growth strategies that -- and objectives that both Steve and I have shared with you on this call.

Looking at our other markets, the industrial business remains robust, while manufacturing housing has flattened out somewhat from our strong fourth quarter. Again, this is in line with our expectations.

Going forward we believe BlueLinx is well positioned in this environment to continue to capitalize on the many specialty products opportunities available in our markets, while at the same time effectively managing our structural business. Our organization, our people, our systems, and our initiatives are focused on these two things, aggressive pursuit of specialty and effective management of structural.

Now I would like to turn the call over to David for a review of our financial results.

I will start my presentation with slide 15, which presents quarterly sales. For the quarter ended April 1, 2006 BlueLinx reported sales of $1.38 billion, up 2% or $25 million from last year's first quarter. The sales increase was due largely to increased unit volume in specialty products, resulting in a 5% overall unit volume increase that offset a 3% decline in prices.

Turning to slide 16, BlueLinx generated $130 million in gross profit for the quarter, up $11 million or 9% from last year. Gross margin for the quarter was 9.4%, up from 8.8% last year, reflecting the factors previously discussed.

As shown on slide 17, operating expenses for the first quarter totaled $102 million, an increase of $7 million, or 6.9%, from a year ago. The increase primarily reflects approximately $4 million in normal ongoing operating expenses associated with Lane Stanton Vance, which was acquired last July. Operating income increased by $4 million to $28 million, reflecting increases in gross profit, partially offset by increases in operating expenses.

Turning to slide 18, and moving down the income statement. Interest expense for the quarter was $11 million, up $2 million from the prior year, due to rising interest rates that were partially offset by lower debt levels. The tax expense of $7 million for the quarter reflects a 40% effective tax rate compared with 41% last year. Net income was $9.8 million or $0.32 per diluted share compared with $8.4 million or $0.28 per share last year.

Now let's turn to slide 19, which shows the balance sheet at the end of the first quarter. Assets on April 1, 2006 totaled $1.26 billion compared with $1.16 billion at the end of 2005. Accounts receivable at $481 million were up about $81 million from the fourth quarter, reflecting the seasonal increase in sales. Total liabilities of $1.07 billion include $403 million in accounts payable and bank overdraft, and debt of $626 million, consisting of $461 million outstanding on our $800 million revolver and a $165 million mortgage note. Total debt for the first quarter increased by $85 million, reflecting seasonal increases in working capital.

Moving to cash flow on slide 20, first quarter net cash used by operations was $66 million, primarily reflecting increased receivables in accordance with rising sales and seasonal increases in inventories, which were partially offset by a corresponding increase in accounts payable. This compares with $82 million in net cash used in operating activities in the first quarter of 2005.

Cash from financing activities of $70 million primarily reflects increased borrowing under our revolver to support seasonal working capital requirements. This compares to $87 million in the first quarter of 2005. The resulting cash balance at the end of the quarter was $27.4 million compared with $18.7 million a year ago.

This concludes my compared remarks. I will turn the call back to Steve for closing comments.

Our first quarter provides solid evidence that BlueLinx continues to make good progress in the two areas we believe are most critical for our future success, rapid growth of specialty products and profitable management of our structural products business. Consider the following. In the first quarter specialty products accounted for 42% of total revenue, but 62% of total gross margin. Our objective is to grow specialty to more than 60% of total revenue.

In the first quarter specialty product unit volume growth grew nearly 15% from the first quarter of 2005, when we grew specialty less than 2% from the prior year. Specialty unit volume growth has been increasing in each of the past four quarters, with an accelerated trend over the past two.

Our plan is to continue this trend. And we will do it by introducing new products like Louisiana Pacific's WeatherBest composite decking and SmartSide siding and trim, as well as other products you will be hearing about in coming months; by expanding our specialty products into new geographic markets. Our Western region, for instance, has been and is still largely structural products oriented. We're changing that, and we believe we have the people in place to do it. By increasing our share in under penetrated markets. As I said industrials represent about 22% of our end use markets, yet we have only a 3% market share, a huge opportunity for us that we're working to capitalize on -- and through acquisitions. They must be strategic and add value, and we are actively looking.

And finally by running our structural products business with a profit orientation. And we will continue to find ways to actively manage our inventories to mitigate pricing risks, as well as servicing our customers.

I want to repeat what I said during the last quarter's conference call because it is critical that investors in our Company or those considering investing in our Company understand it. What I said this is. I can't emphasize enough the sense of urgency with which we're pursuing our strategic shift to specialty products here at BlueLinx, and the resources we're marshaling to support it. It is the number one strategic imperative. Specialty offers higher margins, less price volatility, and is very well-suited to our unique centralized distribution platform, our sales force and our high service solutions based value proposition.

With that said, as we begin our second quarter and look forward into the year, the head winds in the form of an anticipated slowdown in housing starts are still with us. The supply chain has adopted a somewhat cautious tone amid uncertainties surrounding the housing market. In structural, our customers are buying just that they need and keeping inventories lean.

Our experience so far this year aligns with our expectations, and is consistent with our view of 2006 that we shared in our last conference call, and that is a slowdown in housing starts of approximately 10% for the year. Which we believe will be partially offset by strength in manufactured housing and industrial production, resulting in an overall decline in our end use market demand of 1 to 2%.

In terms of pricing, we continue to expect 2006 structural product prices to be generally lower than 2005, reflecting decreased demand and some increases in supply. The decline may be partially offset by increases in some specialty products due to raw material costs. As I said, our experience today is consistent with this view. As George noted earlier, our strategy in this environment is to continue aggressively pursuing specialty product growth, tightly managing inventories, and attempting to outgrow the market in specialty unit volume.

With that said, I would like to open the call up to questions. So, operator, if you could instruct everyone please.

(OPERATOR INSTRUCTIONS). Edings Thibault of Morgan Stanley.

Just a question. By the way, congratulations on a very strong quarter. But I wanted to ask you about the approach and the emphasis on the industrial business. Can you talk about the kind of value-add proposition that you think BlueLinx brings to some of these industrial customers, and where perhaps they may be sourcing some of their distribution needs today?

I'm going to let George address that.

The industrial classification of customers is broad. But the things that they have in common are -- just in time delivery is very, very important, a product mix is very, very important. So basically having the right product at the right location at the right time is very, very strategic to our typical industrial customer. The last thing that can happen to a production line is not to have the raw materials and force that production line to either slow down or stop. That fits right into our sweet spot.

As you think about -- are they using primarily small -- the types of customers that you're targeting today, are they utilizing -- trying to utilize their own distribution systems or are they utilizing competitors'? Primarily industrially focused competitors, how are they having their needs met today?

Our typical customer would be doing business with distribution competitors. Those competitors are usually more regionally focused than us and have a narrower product offering, so that might they to do business with any number of distributors of the product, where we can put many of those items on the same truck. The other thing is that -- remember as the supply chain gets longer, many of the products that used to be produced in North America are now produced offshore, making supply chain management and the skills that we bring far more important to that now longer supply chain.

And then just one final question. As you look forward, you mentioned obviously the specialty is a focus, and you talked about trying to maintain the trajectory of growth that you established in that business from a unit volume perspective. Should we expect any mix shifts in that business as you go through the year? or put it another way, should we expect gross margins -- I don't want to put you in the spot of giving guidance, but should we expect gross margin's growth to broadly follow unit volume growth in the specialties business?

Let's put it this way. We do not anticipate a significant mix shift within the specialty category that would affect weighted average gross margin from that category, from what we have experienced in the past.

But is anything seasonal that we should be aware of that may be shifting in that business, just going into the second and third quarters?

No. There's always puts and takes throughout the year, but there's nothing that should move it significantly one way or another.

(OPERATOR INSTRUCTIONS). At this time there no further questions.

Thank you everyone for joining us today. I just want to leave with you with three quick thoughts. First, we are aggressively pursuing specialty product growth, which is our primary focus. Second, we are and will remain committed to structural products, but intend to achieve profitable growth. And third, over the long term we believe we will continue to outgrow the market.

We have taken and will continue to take the steps necessary to ensure the talent is on board to execute this strategy. Thank you for your time. And we will talk to you again next quarter.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.