Bluelinx Holdings Inc (BXC) 2009 Q2 法說會逐字稿

Good morning. My name is Kiri and I will be your conference operator today. At this time I would like to welcome everyone to the BlueLinx second-quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, Thursday, August 8, 2009. Thank you.

I would now like to introduce Mr. Russ Zukowski, with investor relations. Mr. Zukowski, you may begin your conference.

Thank you, operator, and welcome, everyone, to the BlueLinx second-quarter 2009 conference call. With us this morning are George Judd, Chief Executive Officer, and Doug Goforth, Chief Financial Officer.

Our 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.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 filings 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'd 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 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 Financial Officer, Doug Goforth.

Good morning, everyone, and thank you for joining us today. For the second quarter of 2009, we reported net income of $628,000 and earnings of $0.02 per share for the quarter. Our reported results include certain special items which I will discuss in a moment. But first I wanted to provide some commentary on the quarter.

Our results for the quarter reflect the continued weak demand for building products as housing starts declined by 46% from the prior-year period. Gross margin was 11.4% for the quarter, down from last year's 12.9%, which had benefited by approximately 130 basis points as a result of the significant increase in metal product prices.

A significant percentage of our decline in revenue is also directly related to the weak market in metal products and reduced metal prices. BlueLinx's revenue from metal products is down $115 million, and the gross profit generated from metal products is down over $20 million when compared to the year-ago quarter.

BlueLinx managed our receivables very well during the quarter, with tight credit policies limiting our bad debt expense. However, they also impacted our revenues, as we limited sales when we viewed the risk to be too great.

During the quarter, we generated approximately $8 million in cash from operations and had approximately $184 million in excess availability at the end of the quarter. We reduced our net debt by $14 million from the end of the prior quarter and ended the second quarter with a cash balance of $53 million. At quarter-end, our net debt was $299 million.

Our reported results included the following after-tax items. Gain on the early cancellation of our Master Supply Agreement with Georgia-Pacific of $10.6 million or $0.34 per diluted share. On April 27, 2009, BlueLinx reached an agreement with Georgia-Pacific to cancel our Master Supply Agreement. As previously disclosed, under the terms of this agreement Georgia-Pacific has agreed to pay BlueLinx $18.8 million in cash in four quarterly installments of $4.7 million beginning in May 2009. While early cancellation of this agreement allows BlueLinx the opportunity to pursue strategic relationships with other suppliers, we also continue to distribute a wide variety of Georgia-Pacific products.

Gain on sale of certain surplus properties of $2.6 million or $0.08 per diluted share. The Company sold certain surplus properties during the quarter. These properties were comprised of a facility that ceased operations in early 2008 and surplus land.

Facility consolidation and severance charges of approximately $650,000 or $0.02 per diluted share. During the quarter, we consolidated certain facilities, resulting in consolidation and severance charges of $650,000.

A non-cash charge related to our ineffective interest swap of approximately $1.1 million or $0.03 per diluted share. On May 1, 2009, the Company reduced its borrowings under its revolving credit facility by $15 million, which resulted in a second-quarter non-cash interest charge of approximately $1.1 million related to our ineffective interest rate swap. The Company used cash on hand to pay down this portion of its revolving credit debt.

Turning to slide 5. Overall sales for the second quarter ended July 4 totaled $423.5 million, down 49% or $411 million from second-quarter 2008. Specialty sales declined 38% from the same period last year, with the majority of the decline coming from lower unit volume. Structural product sales declined 59% as a result of a 50% reduction in unit volume and a decline in average prices for these products. Specialty products comprised 58% of total sales, up from 48% in the second quarter of 2008.

BlueLinx generated approximately $48.3 million in gross profit for the quarter. Gross margin was 11.4%, an increase over the first quarter of this year, but a decrease from the 12.9% generated in the prior comparable quarter, which had benefit from a run-up in structural metal prices during the second quarter of 2008.

During the quarter, we remained focused on achieving gross margins above historical levels through our ongoing management of product pricing and sales discipline.

Operating expenses for the quarter, $37.7 million for a decrease of $48.6 million or 56% from a year ago. The decline in operating expenses reflects the gain recorded on the early cancellation of the Master Supply Agreement; decreases in payroll and payroll-related costs of $16.8 million related to lower headcount; and approximately $4 million in lower fuel costs.

The Company reported an operating profit for the second quarter of $10.6 million compared to an operating profit of $21 million in the prior-year period, reflecting the decline in gross profit partially offset by the $48 million decline in operating expense.

Our second-quarter net income of $628,000 or $0.02 per diluted share compares with net income of $6.6 million or $0.20 per diluted share in the second quarter of 2008. Our reported net income for the period includes the items described above and is after recorded interest expense of $9.6 million, which includes the $1.1 million non-cash charge associated with our interest rate swap, compared to interest expense of $9.4 million in the prior-year period, and is after a tax provision of $31,000 compared with provision for taxes of $4.9 million in the prior-year period.

Looking at the year-to-date results on slide 6, sales for the six months ended July 4 totaled $830.6 million, down 47% from the same period last year. Gross margin of 11.1% declined from 11.9% in the year ago period; and year-to-date reported operating expenses declined 42% from the same period last year, generating an operating loss of $7.9 million largely driven by housing-related drop in demand.

The year-to-date reported net loss of $60 million or $1.93 a share compares with a net loss of $4 million or $0.13 a year ago. This year-to-date loss was driven predominantly by the weak operating environment in which housing starts declined 48% from the year-ago period, as well as the deferred tax asset valuation allowance recorded in the first quarter of 2009, and other restructuring costs, offset in part by the gain on the early cancellation of the Master Supply Agreement with G-P.

Turning to cash flow on slide 7, during the quarter, we generated approximately $8.4 million in cash from operating activities, which compares to net cash generated by operations of $52.1 million in the second quarter of 2008. As we have discussed on prior earnings calls, we will continue to aggressively manage our working capital items on an ongoing basis, but do not expect the levels of cash generation from working capital to be at the levels obtained during 2008.

Cash used in financing activities was $21.5 million for the quarter, driven by a $15 million decrease in outstanding borrowings under our revolving credit facility, a $3.2 million mortgage principal payment, and approximately $1.8 million reduction in bank overdrafts.

For the first half of 2009, we used approximately $13 million of cash for operating activities compared to generating approximately $31 million in cash during the year-ago period. Cash used in financing activities during the first half of 2009 was $91 million, driven by a $75 million decrease in outstanding borrowings under our revolving debt facility and a $10 million reduction in bank overdrafts. This compares to $16 million used in financing activities, driven by a $17 million decrease in borrowings for the similar year-ago period.

The resulting cash balance at July 4 was $53 million compared with $30 million a year ago. While we do not provide guidance, we would like to remind you that once sales begin to increase we will use cash as our receivable balance increase and we match our inventory levels with the increased demand.

Moving to slide 8, we had $184 million of excess availability under our revolving credit facility as of quarter-end. The combined debt balance of our mortgage and revolving credit agreement was $367 million, a decrease of $78 million from July 3 and down $94 million from a year ago. Net debt at the end of second quarter was $299 million compared to $285 million at January 3, and was down $132 million from a year ago.

Turning to slide 9, cash cycle days for the second quarter totaled 53. That compares with 50 days for the first quarter of 2009 and 52 days for the same period a year ago. We continue to focus on tightly managing our accounts receivable portfolio and our credit approvals, to ensure we are selling to customers who pay us in a timely manner.

Inventory days improved from the year ago same quarter as we continue to actively manage inventory levels across the Company while increasing the mix of specialty products versus structural products in the inventory over the prior-year period.

In summary, we generated operating cash during the quarter. We ended the quarter with $53 million in cash and cash equivalents. We remain focused on driving gross margin higher than historical average. And our liquidity includes $184 million of excess availability at July 4, 2009. Now let me turn the call over to George.

Thanks, Doug. Good morning. We're all aware that the operating environment has been difficult over the past three years. The nation has never seen this level of housing activity, nor have we seen such a long period of depressed housing demand. The market is still very difficult, and we remain focused on managing our costs and working capital and overall operating efficiency while delivering superior service to our customers and our suppliers.

However, I am encouraged by signs indicating our industry may be stabilizing. The second quarter did begin to show signs that demand for building products may have hit its bottom. In many markets across the country, inquiry levels for the products and services BlueLinx provides have increased. While recent housing starts are still at severely depressed levels, I am optimistic as we are seeing increases all across the country.

For the balance of the year, I expect to see continued improvement in the industry. We are adjusting our strategy slightly to focus more on growing our share as the business returns. We remain focused on building long-term business with customers and suppliers, and making it more efficient and profitable for our customers and vendors to conduct business with us.

In that regard, we continue to invest in and utilize technology to improve our services. Our redesigned website allows customers to obtain product literature, view product specials, and view available products in their specific geographical areas. The new website is already creating new sales opportunities for BlueLinx.

Using our Virtual Show platform we hosted a Knowledge Forum called Riding the Green to provide further education to our customers on green building products produced by our vendors. During this forum, we provided over 2,500 downloads of product information. Additionally, we used this forum to train over 300 of our sales and product management employees on our sustainability program. BlueLinx is focused on growing our share of the fast-growing green building wave.

We believe our efforts to work closely with our customers and vendors in these difficult market conditions afford us many opportunities. We have grown our customer relationships to include a much broader customer list as well as expanded our relationships with many suppliers to position our Company as a distributor choice.

We are excited by new products that we have taken to market including the recently announced LiteSteel beam from LiteSteel Technologies of America and United Stone Veneer products produced by Ply Gem Industries. Both of these products fill voids in our product offerings.

I fear we're in the trough of this housing correction, and although a quick and strong rebound is not likely, I do feel the worst is behind us. Overall, I am pleased with our performance in this very tough market. We have managed costs well, raised our margin above historical levels, and managed our cash.

We will now begin to focus more on growth and expanding our share as the industry begins its recovery. I believe BlueLinx is well positioned to take advantage of this recovery. We have managed our Company well through the recession; we are well positioned to capitalize on the rebound; and we will continue to diligently manage our Company during the recovery.

With that I would like to open the call up for questions. Operator?

(Operator Instructions) Rick Skidmore, Goldman Sachs.

Good morning. Just to clean up a couple of questions with regards to the charges, the gain on the sale of the properties, is that in the cost of goods sold line? And then the severance charge, is that also in the cost of goods sold line, or is that in the SG&A line?

Rick, those are in the SG&A line.

Both of them?

Yes.

Okay. Then maybe just shifting, as we look at your business, George, maybe you can talk about where you're seeing the stabilization out there. I think you made the comment that maybe you're seeing it across the country. Can you just talk a little bit more about what you're seeing out there from a volume standpoint?

Sure, Rick. The early indicators for BlueLinx are plans. We start to get plans for housing blueprints and takeoffs before the permits are pulled and even before we ever start to see any volumes. That activity has increased substantially, so we're optimistic about that.

Most of those plans, honestly, are in more entry-level housing, lower price point housing. And most of that activity is away from the large urban markets.

Okay. Then just maybe to talk a little bit about the specialty category, where are you seeing any pickup in the specialty area? Maybe can you talk about within specialty what categories you're seeing the pickup, and which ones are the best margins for you?

I'll talk about the overall pickup. Specialty as a whole has a higher margin than our structural business. But our specialty business, the fastest-growing product codes are roofing, insulation products. Roofing as a whole has had a nice growth in the last six, nine months and also had some price increases. Insulation, a little stimulus impact on some of those product areas, which we're participating in and we're focusing on growing that.

Also some of the interior decorative products maybe paneling, moldings, things like that, where remodeling activity has started to show some signs of life. All of those businesses are important to us and all of those tend to be higher margins than maybe even our specialty panel business like particle boards and things like that.

Okay. Then just maybe two last ones. As you see the recovery starting or at least stabilizing and maybe volume start picking up, what do you see the mix of the business looking like as you look out a year, based on whatever your assumption of housing starts might be?

Do you get back to more 50-50 structural-specialty, or how does that look? And I would imagine you're starting to see improvement in metal pricing.

Yes, first, the goal for BlueLinx is still 60-40 specialty versus structural. However, I do forecast a slight downtick from our 58% specialty mix as structural business rebounds, and rebounds before the specialty business. We have to frame the houses before we add a wide variety of specialty products.

So we do forecast that. So I think probably 55-45, but not back to the 50-50 mix that we had.

And Part B of that question was again?

Just what you're seeing on metal.

Metal, steel prices we just had a little price increase on rebar and concrete accessories. But overall, last year was a very, very high runup and a very, very sharp decline, and we're not forecasting any sharp rebounds like we saw last year.

Okay. Then just lastly, when do you start to anticipate that you might turn positive in your revenue comps?

Our revenue comps quarter-over-quarter?

Year-over-year.

Well, we don't provide guidance, but that's our focus right now. We're out there. We've managed all of our cost metrics; and as I said I think we've done a nice job there.

Now we have to make sure that we go out there and take the available businesses and begin to grow our share. That's what we're focused on.

Thank you.

Steve Chercover, D.A. Davidson.

Thank you. Good morning. You talk a lot about growing your share. Can you give us any clues of the strategy? I'm sure it's not just outlasting the competition that's going away.

No, it's not. As we've added products -- and Doug mentioned in his prepared statements that we have tightly managed our credit policies. And quite frankly, with some groups of customers that has cost us some volumes. As there has been stabilization and as we've been able to better assess some of our customer situations, we've gotten back in there and grown some business, and we intend to do that.

Also, there's been -- I think I talked last quarter of over 500 customer locations of ours that have shrunk. All that business is reshuffling. We have to make sure that we're well represented in those markets where the business has been reshuffled and we're focused on that.

We have invested in 2006 and 2007 in a sales performance program. We talked about that extensively during that time period. So we're able to adjust our sales focus to where the demand is and those customers that are growing in specific markets, and we're making sure we manage that. We're spending time for the customers that are growing in their specific geographies.

Great. And call it six weeks into Q3, how are the trends versus Q2? I guess some of the panel prices are better. Are volumes picking up a wee bit?

I wouldn't want to say that panel prices and volumes are correlated. I think prices are up due to curtailed capacity not due to demand. Demand is slightly better than we saw during parts of Q2; but there is nothing to ring the bell about, certainly. It's still a very, very difficult market.

But we're seeing early indicators in many markets. And as I just commented, most of those markets are a little more rural or a little more emerging than the former big Sun Belt markets or the Las Vegas, Phoenix, the big housing markets there. They're New England and parts of the Midwest and locations a little further from the large domestic cities.

And now that G-P supply agreement has been terminated, how are your relationships with the other suppliers evolving?

First, our relationship with G-P is still very good. We continue to buy a large percentage of our structural products and many specialty products, including our engineered lumber program, from Georgia-Pacific and that relationship is still very good.

What the cancellation of the program has done is it allowed us to negotiate product-specific relationships with both Georgia-Pacific and other producers. And that's gone very well. We are growing our business with many producers that we really couldn't participate heavily with under the old G-P contract.

And I think it's been good for them as well as they have been able to tap some markets that maybe they weren't focused on under the old G-P BlueLinx relationship.

Does that broader product array give you better penetration or opportunities with the big boxes?

It does give us some opportunities with big boxes. It also gives us opportunities in some geographies. You know, freight is such a large percentage of structural and wood product delivered prices. So where maybe a Georgia-Pacific mill wasn't the closest mill to the market, we might have had a lower share.

Now we're able to participate with mills that may be closer to that market and grow that share. So we have seen some rebalancing of our efforts due to the supply that's available to us.

Very good. Well, thanks very much and good luck going forward.

Thanks.

Anthony Dayrit, Morningstar.

Hi, good morning, everyone. Thanks for taking the question. My question was kind of on the nonresidential side. You've already given a pretty good explanation of what you are seeing on the residential front. But I'm just curious to see what your outlook is like on the nonresidential side.

You know, I'll be honest with you, the expected uptick from some of the stimulus spending in the public sector -- schools, etc. -- has been slow to develop, and it has not replaced the decline that I think we all forecast on hotels and strip shopping and office building construction, which is really very, very depressed right now.

So we expect that to continue, although we are optimistic that sometime eventually some of those stimulus dollars will drive road construction and schools and hospitals and things like that.

Okay, great. Thank you. Just one quick housekeeping question on your mix during the quarter. The residential versus nonresidential in terms of sales?

We don't really break that out, Anthony.

Okay. Great. Thank you very much.

(Operator Instructions) There are no further questions at this time. Mr. Zukowski, do you have any closing remarks?

It's George, and thank you all for joining our call and we look forward to talking to you all next quarter. Thank you.

Once again, thank you for your participation in today's conference. This concludes today's call. You may now disconnect.