Bluelinx Holdings Inc (BXC) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the BlueLinx first quarter conference call. All lines have been placed on mute to prevent any background noise. After today's presentation there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you. I will now turn the call over to James Storey, Vice President, Investor Relations. Please go ahead, sir.

Thank you, operator. And welcome everyone to the BlueLinx first quarter 2007 conference call. With us this morning are Steve Macadam, Chief Executive Officer, George Judd, President and Chief Operating Officer, and Lynn Wentworth, Chief Financial Officer. Our press release was issued earlier this morning. For those of you you who do not have a copy, it is available in the investor relation section of the company's website at www.bluelinxco.com

Before starting the call, I need to refer you to our Safe Harbor statement. I would like to 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. A discussion of factors that may affect future results is provided in the company's filing with the Securities and Exchange Commission. BlueLinx undertakes no obligation to publicly update or revise any forward-looking statements contained in these presentations based on new information 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. We will be referring to these slides during this call and we encourage you to review them during our remarks. The slide package contains an appendix of supplementary tables available for your your review.

During the course of this call, you will hear us talk about two basic product categories of our business, structural products and specialty products. As a reminder, our structural product business consists of plywood, lumber, OSB, also known as oriented strand board, and rebar remesh. Our specialty products business is basically everything else, including engineered lumber, molding, insulation, hardwood, plywood, vinyl siding, metal fasteners, specialty lumber, roofing and so on. As part of our special growth strategy you will hear us talk about our industrials business. Our industrials business consists of customers who use the building products we distribute in a manufacturing line to make a wide range of products including furniture, fixtures, cabinets, containers, pallets, boats, concrete structures and mill work. Now let me turn the call over to our Chief Executive Officer, Steve Macadam.

Thank you, Jim. Thank you to everyone else for joining us this morning for the BlueLinx first quarter earnings conference call. I will provide a brief overview of our first quarter. Then Lynn will walk you through our financial results followed by George who will review operations. I will close our prepared remarks with an assessment of current conditions then open your call to questions. In the first quarter -- the first quarter of 2007 was challenging for BlueLinx as we continue to operate in a depressed business environment, the likes of which this industry has not experienced in many years. Demand for our products related to new home construction remained weak, a result of the ongoing correction in housing market evidenced by the 30% drop in first quarter housing starts from a year ago. This slowdown, combined with sharply lower year-over-year prices for key grades of wood based structural products, pressured profits in the first quarter.

We face these challenges by aggressively managing costs and continuing to focus on our long-term growth objectives. We focused on serving our customers and securing long-term business. We focussed on preserving and strengthening profitability in the face of increased price competition. We did not chase unprofitable transactions for the sake of market share. We focused on expanding our specialty product pipeline and, as Lynn and George will discuss, we continued to invest in the programs and processes that will help ensure our position as a market leader for years to come. We remain focused on our long-term objectives which are to grow speciality products to more than 60% of total sales, to profitably manage our Structural Products business and to outgrow the overall market over the long-term. These objectives remain constant, regardless of market positions, and I am confident we are taking the right steps and making the appropriate investments in this environment to succeed in all of these goals over the long term. With that said, I would like to now turn the call over to Lynn Wentworth, who will walk you through our financial results for the quarter.

Thank you, Steve. I'm going to review our financial results with you focusing on the drivers of our performance during the quarter. Let's start with quarterly sales on slide 7. Overall sales for the first quarter were $957 million, down 31% or $420 million from the first quarter last year. The overall sales decrease was largely the result of lower unit volumes, combined with significant declines in structural prices.

Turning to slide 8, BlueLinx generated $104 million in gross profit for the quarter, down $26 million or 20% from last year. Despite the challenging operating environment, we improved our overall gross margin to 10.8%. That's a 140 basis point improvement over the same period a year ago and a 100 basis point improvement from the fourth quarter. It's also our best quarterly gross margin performance since before the company went public in the fourth quarter of 2004. Our focus on gross margin performance benefited during the quarter from both stable, wood-based structural product prices and some shift in our channel mix. Structural gross margin increased from a year ago across all of our delivery channels. Revenue flowing through warehouse also increased while lower gross margin, direct ship revenue decreased as customers who are trying to tightly manage their inventories in this environment shifted their orders to smaller (inaudible) quantities.

Channel mix analysis is available on pages 29 and 30 in the appendix of this presentation. Just as significantly, we achieved a 10.1% gross margin for the trailing 12 months which, as you know, has been one of our industry's most challenging operating environments in decades. We believe our gross margin performance is a key indicator that BlueLinx is effectively executing in a difficult environment characterized by depressed demand and related pricing challenges. The 100 basis point gross margin improvement from the fourth quarter equates to about $10 million in additional gross profit which we believe reflects positively on our ongoing effort to focus on margin and manage costs.

Moving on to slide 9, operating expenses for the quarter totalled $94 million, a decrease of $8 million or 8% from a year ago. The decline primarily reflects decreases in variable compensation, lower payroll related to headcount reductions and other expenses that aren't directly related to head count. Operating income for the first quarter was $10 million, compared with $28 million a year ago, reflecting the decline in gross profit that was partially offset by the $8 million improvement in operating expense. As I just pointed out, we have been managing our cost diligently. Since June of 2006, we have removed significant costs from our business, a large part of which was from headcount reductions taken last fall. We will continue to manage our cost structure relative to business conditions as we move forward in 2007. We also continue to invest in improvements that will position us to achieve our long-term objectives. For example, in the first quarter we made a significant investment in a sales process and productivity improvement program designed to increase market share and profitability. This is a long-term program that we believe will generate strong returns as we roll it out across all our markets.

Turning to slide 10, the first quarter net loss of $200,000 or $0.01 per share compares with year ago net income of $9.8 million or $0.32 per share. The net loss is after interest expense of $10.6 million, which decreased by $600,000 from the prior year and after a tax benefit of $100,000, compared with a tax expense of $6.6 million a year ago.

Moving on to cash flow on slide 11, I would like to remind everyone that our business is seasonal and that first quarter working capital typically increases from the fourth quarter. We started the first quarter with $27 million in cash. During the quarter, receivables increased by $70 million in accordance with rising sales and inventories increased $55 million. These increases were partially offset by a $38 million increase in accounts payable related to inventory investments. First quarter net cash used by operations of $77 million compares with $66 million in the first quarter of 2006. We used $5 million in investing activities this quarter, primarily for process and system improvements in support of our ongoing specialty sales growth strategy. Key initiatives this quarter included programs designed to improve and fine tune our capabilities in inventory management and forecasting, in financial reporting and budgeting, in order tracking and visibility and in product marketing. With the exception of sales training, these are all included in our $14 million capital forecast for 2007, of which approximately 40% is designated for these strategic initiatives.

Again, we believe these are necessary investments to support our growth strategy. Cash provided by financing activities was $75 million for the quarter. We drew down an additional $79 million o our revolving credit agreement and paid our regular quarterly dividend of $0.125 per share or $3.9 million in total. The resulting cash balance at March 31st was $20 million, compared with $27 million a year ago. We had $294 million available on our revolving credit agreement. Combined debt balance on our mortgage and revolving credit agreement was $611 million, an increase of $79 million from December 31, 2006, largely reflecting seasonal increases in working capital, but still down $15 million from a year ago.

Now let's look a little more closely at inventory on slide 12. Our first quarter inventory position of $466 million declined 7% from a year ago, but was up 13% from the fourth quarter, reflecting both seasonal factors, as well as ramp-ups in support of new products and vendors as a part of our ongoing focus on specialty product growth. Specialty inventory of $281 million was 60% of total inventory, an increase of 11% from the fourth quarter and 5% from a year ago. Structural inventory of $160 million was up 14% from the previous quarter, but was down 18% from the same period a year ago.

Turning to slide 13, working capital turn dates for the first quarter totaled 53, compared with 40 days from the same period a year ago. On a trailing 12 month basis, working capital turn days were 49 compared with 40 a year ago. As we previously discussed, our transition to speciality products will entail higher inventory turn days. However, first quarter inventory turns were still higher than we would like as we built positions in anticipation of a seasonal pickup that has been slow to materialize and as we took advantage of pricing opportunities to build stock in certain categories.

In summary, on slide 14, let me point out that we managed our margins well in this continued challenging environment. We aggressively managed costs. We invested in inventory for both anticipated seasonal demand and to support our ongoing speciality products focus. As we move forward, we have the financial resources necessary to maintain our dividend and to remain on our strategic course, despite the challenging environment. We believe the infrastructure investments we're making now will serve us well over the long-term. Now let me turn the call over to George, our Chief Operating Officer.

Thanks. Lynn. I'll review our operational performance for the quarter. As you know, our primary strategic objective is to grow specialty product sales to greater than 60% of total sales. Specialty offers higher margin, less price volatility, and is well-suited to our unique centralized distribution platform, our national sales force and our solutions-based value proposition. In the first quarter, operating in an environment marked by significantly depressed demand, relative to the year ago period, we continue to make progress toward our specialty product objective. We held margins as pricing competition accelerated and, as noted on slide 16, we grew specialty product sales to 47% of total sales. That's up from 42% a year ago.

Turning to slide 17, specialty sales declined 21% from the same period last year. Structural product sales declined 36%, approximately 2/3 of that decline resulting from unit volume and the remainder coming from price deflation. The slowdown in demand has created a very competitive pricing environment for both specialty and structural products. Despite this environment, we improved gross margin for the first quarter. Specialty product gross margin was 13.9%, unchanged from a year ago, but up 10 basis points from 13.8% in the fourth quarter. Structural gross margin improved to 8.7%, from 6.9% a year ago, from 7% in the fourth quarter. We operate in a cyclical market environment and we believe this market is near the bottom of the cycle.

Maintaining gross margin in this type of environment is crucial to our future growth strategy. In the first quarter, we could have chased and won more transactional business at lower margins. But that business would not have been profitable. Our value proposition is based on a high level of customer service, on getting the right product to the customer when the customer needs it and on partnering with our customers to find the best cost solution to their inventory management challenges. BlueLinx will continue to win business over the long run as we remain focused on adding value to our business.

Looking at slide 18, our total estimated unit volume contracted 22% in the first quarter, relative to a year ago, compared with the decline of 18% for the estimated end use markets. Our structural unit volume declined 23%, due to the demand slowdown resulting from the ongoing correction in the home building industry and due to our pricing strategy which is based on making prudent decisions, balancing volume with overall profitability and our ability to serve customers in this very difficult environment. In the first quarter we were able to improve our gross margin of wood-based structural products in a relatively stable pricing environment, even though these prices at the end of the first quarter were down approximately 26% from the same time a year ago. Although it appears that wood-based structural product prices have stabilized in a narrow range near their manufacturing costs, we do not expect any sustained price increases until demand returns with the eventual recovery of the housing sector. Specialty unit volume in the first quarter declined by 21%, underperforming our estimated end-use market by nearly three percentage points.

As you can see on slide 19, this is the first time, since we began tracking specialty unit volume growth versus our end use markets, that we have underperformed. We are disappointed with this result. We believe that there are primarily two reasons for this. First, while we always work hard to meet the needs of our customers, we maintain the discipline in not chasing unprofitable business during the quarter in the face of increased price competition. We grew longer term businesses with our customers but that business is tied to the demand in their businesses, which was very slow. We made the conscious decision not to chase some unprofitable business and that decision, which we think was the right one, given our long-term value proposition, resulted in some loss of market share. Second, as we discussed in our last conference call, we have made some key product transitions with suppliers in fiberglass insulation and hard wood plywood.

We've aligned ourselves with strong brand names and world class manufacturers in Johns Manville, CertainTeed and Columbia Forest Products. The sales ramp-up of these and other product lines takes several months as we build our customer base. As we said in our last call, we believe the transition to these lines is the right move for the long-term success. We believe our approach is the right one. We're making prudent and appropriate decisions every day to strengthen our long-term value proposition with customers and vendors by maintaining appropriate margins and declining to participate in unprofitable transactions in this depressed business environment. We remain confident given our customer and vendor relationships and our specialty product pipeline that we will outperform the market over the long-term, growing both specialty and overall market share as we execute our strategy and our business environment recovers to a more normal growth rate.

Turning to slide 20, let me review the five key initiatives we are pursuing to support our strategic objectives. First, we are improving gross margin, primarily by doing two things. One, by managing our structural products business for profitability and two, by increasing our mix of speciality products. Let's start with the structural products. Since going public in late 2004, we have been focused on reducing the impact of price declines in the structural markets on our gross margin performance. We have executed this strategy in the current environment and we have maintained a steady or improving structural product gross margin in each of the past four quarters. We also are improving gross margin by increasing our mix of specialty products.

Looking at our specialty products business, our new pipeline, our new product pipeline is strong, manufacturers are asking us to distribute their products. Our challenge is in choosing the right product and introducing the product across the sales platform in a timely manner. In addition to Johns Manville, CertainTeed, and Columbia Forest Products, we are making good progress with the roll out of Hitachi power tools and fasteners, and with our own private level brands including steel links metal products and our (inaudible) PVC trim and moldings. We recently partnered with Fletcher Wood Solutions to distribute and support its Lifespan wood trim products. We are very excited about the growth potential for our engineered lumber now that Georgia Pacific has increased capacity with the acquisition of a plant in Thorsby, Alabama.

Our second key initiative focuses on making necessary investment to support our specialty growth strategy. In addition to the sales affecting this program and the inventory and financial management systems mentioned by Lynn, we are investing in our distribution facilities to make them more efficient and to leverage value-added opportunities in specific markets. In Lawrenceville ,Georgia, for instance, we have added a metal roll former so that we can make our own metal roofing and siding to address a significant market opportunity in this region. In Kansas City we have added a saw shop. In Fort Worth. a molder and a planer. We will continue to invest in low-capital, value-added finishing operations to address specific opportunities.

Third we are pursuing under-represented business areas where we see good opportunities. The best example of this is in our industrial business. An important but highly fragmented market that aligns well with our specialty growth objectives. We have become increasingly focused on identifying and serving the needs of this diverse group of customers. They make everything from furniture and fixtures to cabinets and caskets, containers, pallets, just about anything that incorporates our products into their finished goods.

Fourth, we continue to expand relationships with existing vendors whose business needs align well with our value proposition. We are working with Hitachi to expand the rollout of its line of power tools and fasteners following our successful introduction in the west. As I mentioned earlier, we are partnering with Georgia Pacific figure to take advantage of the opportunity we jointly see in engineered lumber.

Our last initiative is acquisitions. We are actively looking for acquisition opportunities that fit well with our specialty growth strategy. We continue to believe that acquisitions will play an important role in our ability to achieve our long-term strategic objectives. We expect the opportunities to accelerate given the conditions in the market. This concludes my prepared remarks. Now I would like to turn the call back over to Steve.

Thanks, George. Before turning the call over to the operator for questions, let me summarize our position as we move forward in 2007. First, when you look at the magnitude of the housing slowdown and the accompanying year-over-year deterioration of wood-based structural product prices, we are operating in probably the worst business environment for our industry in the past 25 years or so. We can't control that. What we can do is leverage this environment, first to protect our business by adjusting to these conditions and second, by investing to ensure that we are well positioned to capitalize on growth opportunities both now and when conditions improve. We believe we're making good progress. We have managed our business well in the this environment. We have removed costs from our organization to remain competitive while continuing to execute our growth strategy. As Lynn and George discussed, we have invested and continue to invest in our business for the long run.

As we look forward in 2007, we see no signs of significant recovery in our housing related business, with the exception of some mild seasonal firming. However, our major end use markets do currently appear to be stable and, although weak, are not further deteriorating. So we remain focused on defending and enhancing our value proposition to customers and suppliers. We also are looking for opportunities to expand our business through acquisitions. We have both the financial flexibility and the available resources to execute our acquisition strategy as we find the right opportunities. Based on the wide range of forecasts that we monitor, the long-term prognosis for household creation in new home construction remains strong, but the housing sector needs to work its way through this rebalancing.

As I said during our last conference call, our 2007 operating plan is based on expectations that our sales will decline from 2006 levels as the overall market for the products we distribute continues to contract, pressured by the housing start situation and significantly lower year-over-year prices for structural products. Our plan for 2007 remains to, one, improve overall gross margin performance by continuing to shift our product mix to specialty, and by effectively managing structural product inventory and what we expect to be a lower but generally stable price environment. Two, to remain vigilant in controlling and managing costs and working capital and three, remain focused on making the appropriate investments for long-term success. We're confident that this is the right strategy moving forward. With that, we'll open the call up to your questions. Operator, would you instruct everyone on questions, please

(OPERATOR INSTRUCTIONS) Your first question comes the line of [Eddings Fiebalt] with Morgan Stanley.

Hi, good morning. Actually this is Evan Kurtz. I'm sitting in for Eddings this morning. Now that we're a couple months into Q2, how has the pick up in seasonal demand been versus your expectations going into the quarter?

Well, we're actually only one month into Q2 but --

Sorry.

I think it's consistent with our expectations.

Okay. The other thing is I was looking the warehouse gross margin numbers were up, I believe they're the highest they've been since '05. How much of that is due to just an average lower cost of goods sold from billing inventory with lower wood prices versus other factors and do you expect those kind of 12% margins going forward?

Well, actually most of it, almost all of it is the mix shift of specialty, Evan.

Stabilization of our structural prices, we didn't build inventory and have it gain value in our structural business.

You got to remember, in the second half of last year, with the dramatic reductions in structural product pricing, our margins were under enormous pressure and that's the environment that we operated in and had to keep our inventories extremely lean but obviously we had to continue to do business. You got to remember that first quarter compared to last year for plywood OSB and lumber, those are average down 26% in published prices with OSB leading the way, down 47.5%. So dramatic price and that happened basically in the second half of last year.

Right. Okay. So the outlook is good going forward then?

Well, yes, I mean the outlook is. Obviously we see structural products being flat. We don't think there's much hope for significant recovery until, as George mentioned I think in his remarks, until the housing sector recovers. There's really little hope that we're going to see any significant increases in the commodity side.

Great. Well, thank you very much.

You're welcome.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Mukul Kochhar with CIBC World Market.

Hi, guys. Good morning.

Good morning.

Just a quick question. Did you guys see any impact of bad weather this quarter, do you think revenue suffered a little bit because of that.

George, do you want to take that? We did have a lot of storms.

boy, you could be one of our regional vice presidents. We like to use weather as often as we can. Really, I try not to talk about it. We have winter every year to varying degrees. Winter seemed to stay a little later this year than we would have liked in many parts of the country. But we forecast in the cold climates. We forecast business to be slow because of the weather. I really don't think that business was hugely impacted in the quarter because of any weather and I'm not planning on any lost business due to weather impacting Q2.

Sounds good. On the margin side, just to get some clarity on the response for the last question, on the year-over-year, seemed like across the channel, across all of the different channels, in structural there was vast improvement in margins which would point to maybe these margins being sustainable going forward. What do you think about that?

I think the important things to understand in our margins, this is the first quarter where we had relative stability on our blended mix of structural products. We have been fighting a real strong headwind with devaluating inventories. We've been managing our inventories very quickly and turning them. We continue to do that in Q1. We turn our inventories on our structural business very effectively. And we didn't -- we couldn't go chase a lot of the real low margin business that was out there and maintain profit, a profitable stand. So we passed on some business and we got paid for our value. If we're adding value to our customer's business we ought to be able to charge it. So I think that given the forecast for structural product prices for Q2 and really beyond into 2007, I think that we'll stay focused on margins and expect consistent margin performance to what we had on our structural business in the near future.

Thanks a lot, guys. Appreciate the help.

(OPERATOR INSTRUCTIONS). At this time, there are no questions in queue.

Okay. Thank you everyone for joining us today. I want to leave you with four quick thoughts. First, we remain committed to our specialty product growth strategy. It's our primary strategic focus and we continue to align people and processes and products to execute this strategy. Second, we are and will remain committed to structural products but intend to achieve profitable growth in this segment through disciplined inventory management. Third, we're committed to aggressively managing costs and working capital in this challenging economic environment. And fourth, over the long-term, we believe BlueLinx is very well positioned to succeed in one of the -- as one of this country's leading specialty products distributors. So, thank you for your time, and we'll talk to you again next quarter.