Bluelinx Holdings Inc (BXC) 2010 Q1 法說會逐字稿

Good morning. My name is Carrie, and I will be your conference operator today. At this time I would like to welcome everyone to the BlueLinx first quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded today, May 6, 2010. Thank you.

I would now like to introduce Maryon Davis with BlueLinx. Ms. Davis, you may begin your conference.

Thank you, Carrie, and welcome, ladies and gentlemen, to the BlueLinx first quarter 2010 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. A copy of the release is available in the Investor Relations section of the Company's website at 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 provide 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 this morning. I will review the quarterly financial results, then George will provide an operations review of the quarter and add a final prospective before opening the call to your questions.

Let's begin with the quarterly overview.

Overall, unit volume grew 1.4% compared to the year-ago period with both specialty and structural product groups showing increases. Specialty volume grew 2.2% highlighted with growth in roofing, insulation, engineered lumber and structural siding. Structural products grew 0.3% on strong lumber volumes, offset by declines in OSB volumes related to the termination of the Georgia Pacific Supply agreement last year.

Overall, gross margin was 12.1% for the quarter, up from last year's 10.9%, due to our continued focus on margin expansion, rising product prices and growth in our out-of-warehouse business.

For the first quarter of 2010 we reported a net loss of $14.7 million or $0.48 per share on revenues of $431 million.

During the quarter we used $47 million in cash for operations, and we had approximately $186 million in excess availability at the end of the quarter, with a cash balance of $13 million.

Excess availability is up from $157 million at the end of the fourth quarter due to higher seasonal levels of accounts receivable and inventory.

Our net debt was $331 million, up $38 million from the prior quarter.

For a closer look at quarterly financial results-- for those of you following along with the slides posted on the Investor Relations section of the BlueLinx website, I will begin with Slide 5.

Overall, sales for the first quarter ended April 3 totaled $431 million, up 6% or $24 million from the first quarter 2009. This is our first year-over-year increase in quarterly revenue in four years.

Specialty sales were flat year over year while structural product sales increased 11.6% from the same period last year, with the majority of the increase coming from higher wood-based product selling prices. Benchmark grades of wood-based structural products increased approximately 50% over the prior-year period. Specialty products comprised 53% of total sales, down from 56% in the first quarter 2009, largely due to the increase in demand in selling prices for structural products.

Moving to Slide 6, BlueLinx generated approximately $52.3 million in gross profit for the quarter. Our focus on gross margin performance benefited during the quarter from both rising wood-based structural product prices and shifts in our channel mix. Compared with the same period last year, revenue flowing through the warehouse increased while lower margin direct ship revenue decreased.

Gross margin was 12.1%, which is up 1.2% from the prior year quarter, with both specialty and structural margins showing increases over the prior-year quarter.

Operating expenses for the quarter totaled $60.3 million, for a decrease of $2.4 million or 3.9% from a year ago. The decline in operating expenses reflects the impact of decreases in payroll and payroll-related cost related to lower headcount, lower bad debt expense related to improved receivable performance, partially offset by increases in fuel and other logistics costs as we ship more products out of the warehouse.

The overall decline reflects the Company's ongoing focus on managing expenses to the current operating environment.

The Company reported an operating loss for the first quarter of $8 million, compared to an operating loss of $18.4 million in the prior-year period, reflecting an $8 million increase in gross profit and a $2.4 million decline in operating expense.

EBITDA improved $8.8 million over the prior-year period, largely due to an increase in gross profit dollars generated by higher sales and improved margin percentage performance.

Our first quarter net loss of $14.7 million or $0.48 per diluted share compares with a net loss of $60.7 million or $1.95 per diluted share in the first quarter of 2009, which included a $40.2 million tax valuation allowance and a $3.8 million of special-interest-related charges.

Our reported net income for the period is after interest expense of $7.3 million, compared to interest expense of $8.1 million the prior-year period. Our current year net income includes an immaterial tax provision and compares with the provision of $28 million in the prior-year period.

As discussed last year, during the first quarter of 2009, BlueLinx provided a valuation allowance for 100% of its US-deferred tax assets. As a result, the Company's tax provisions in future periods consists of income taxes on earnings of its Canadian operations and certain income taxes but would generally not include any income-tax benefit related to its US operations.

Turning to cash flow on Slide 7.

During the quarter we used approximately $46.6 million in cash from operating activities, primarily reflecting increased receivables in accordance with rising sales, seasonal increases in inventories as well as increases due to strategic buys in certain categories to support our market growth initiatives, which were partially offset by a corresponding increase in accounts payable. This compares with net cash used by operations of $18.4 million for the first quarter of 2009.

As we have discussed on prior earnings calls, we will continue to tightly manage our working capital items on an ongoing basis. However, we expect to consume operating cash as our working capital grows to support an improving business.

Cash provided by financing activities was $30.8 million for the quarter, driven by a $24.7 million increase in the revolving credit facility and a $10 million increase in bank overdrafts. The resulting cash balance at April 3 was $13.4 million, compared with $60 million a year ago.

Moving to Slide 8, we had $186 million of excess availability under our revolving credit facility as of quarter end. The combined debt balance on our mortgage and revolving credit agreement was $366 million, an increase of $25 million from the fourth quarter 2009, reflecting seasonal working capital requirements.

Net debt at the end of the first quarter was $331 million, compared to $293 million at January 2 and was up $18 million from a year ago.

Turning to Slide 9, cash cycle days for the first quarter totaled 49. That compares with 49 days for the fourth quarter of 2009 and 50 days for the same period a year ago. Our performance in this area reflects our daily efforts to manage our working capital risks by selling to the best customers, keeping the right inventory on hand and paying our supply partners in a timely fashion.

Now let me turn the call over to George.

Thanks, Doug, and good morning. BlueLinx continues to focus on managing our customer service and our relationships, our working capital, our gross margins and, of course, cost discipline. The housing industry is still very much in a depression, producing a seasonally adjusted housing start number of 626,000 in March. Although this number's up from 521,000 starts in March of last year, at this pace it will still be the second lowest year on record. While it's great to see growth, we're far from a robust or health housing market.

The first quarter started very slowly and was significantly impacted by severe winter weather in January and February. A very wet winter in the Southern states contributed to wood product price increases that gained momentum in March. Reduced log supply and higher log prices drove price increases for wood-based products.

The Chilean earthquake caused product disruptions that also contributed to increases in wood product prices.

BlueLinx's inventory and logistic network provided our customers with the products they needed. The increases in the percentage of products shipped through our warehouse network and the increases in prices for our product helped fuel our gross margin expansion.

We worked hard to have the right products in our warehouses as mill lead times increased. Having products available when our customers required them, while continue to manage our inventory churns, is a major priority for BlueLinx.

Again, this quarter we have managed our margins well. Both structural and specialty margins are above their trailing 12-month levels. We expanded our margins by adding value to our customers. We delivered quality products on time as promised. And our inventories were well positioned.

I am pleased with both our inventory and margin performance during the quarter.

A larger number of warehouse deliveries and increases in fuel cost could have increased our operating expenses. Or as Doug stated earlier, we managed our overall expenses very well during the quarter, and they fell by $2.4 million compared to last year.

As the market has started its recovery, we have seen demand for our products and services begin to increase. We are excited to share with you this morning that we have been chosen by Lowe's Companies to distribute a proprietary brand of composite decking and railing products in all markets in the United States.

This multiyear agreement reinforces our longstanding strategic relationship with Lowe's, whose business needs align well with our value propositions. We possess the ability to execute a national distribution campaign from our state-of-the-art nationwide distribution platform.

Extruding specialty products, like composite decking and railing, requires a strong capability to deliver just in time as well as a high-touch solution-based service culture, things that we do exceptionally well.

We continue to see revenue growth in key product areas that are early indicators of housing activity. However, we have seen our low-margin OSB business decline as a result of the termination of the Georgia Pacific Supply agreement last year.

While I'm not satisfied with the quarterly loss, I am satisfied that our Company's executing very well in a continuing tough market. I believe the housing market will continue to improve during the year and the worse is behind us. That said, demand will remain very low, and recovery will be slow.

The Lowe's program is one example of our growth strategy to win new business and grow our market share. I'm excited as I have started to see our focus on growth produce results.

BlueLinx is committed to driving improvements in customer service, growing share, expanding our product offering, expanding our customer base, managing our working capital and aligning our costs to the business environment. We will work to grow our value-added products for our key manufacturing partners.

These objectives remain constant, regardless of market conditions, and I believe we are taking the right steps and making appropriate investments to succeed.

With that, we'll open the call to questions. Operator? Operator?

(OPERATOR INSTRUCTIONS) And so our first question comes from Steve Chercover with DA Davidson.

Thank you and good morning. A couple questions. First of all, the spike that we've seen in OSB and lumber prices that really took off in April, will that benefit you in the current and future quarters? And will we see any kind of, perhaps, inventory gains?

Yes, good morning, Steve. Well, yes, the price increase really did gain traction late March and April, so the-- we always see some margin appreciation when our inventory positions gain value. However, it is important to remember that, you know, OSB is something that we have very little investment in our warehouses and we turn very quickly. So our structural product turn days are very fast, and that's the way we manage our business in all markets, and that's the way we manage them through this cycle.

But, yes, you know, increasing prices usually drive increased gross margin percentages.

Thank you, George. And secondly, I don't know if this is a fault in my model or not, but your SG&A expense was higher than I anticipated in the quarter. Would the impact of the weather in the-- I guess in the Southeast in Q1 flow through SG&A?

Well, we'd be happy to talk to you about the model and see if we can help you with that. I'm not sure.

You know, some expenses flow through. We had historically high snow-removal expenses and things like that, but they're not so material that they should impact your model significantly.

Okay. But some of that transportation cost does show up in SG&A?

Yes.

Yes, fuel was up about $1 million, Steve. And if you look at Page-- in the slide presentation we're-- you know, we're including an OpEx expense where we've broken out about a half dozen categories on Page 19. I don't know if you've had a chance to see that yet. I know it's early for you out there.

No, I (inaudible).

But that might help as you look at your model. But there was nothing unusual in our expenses for the quarter.

Yes. Our expenses as percentages of revenue by channel all went down.

Okay.

So we were very happy with our expense performance.

Right. And you think about it, our warehouse business was up significantly, which drives our logistics in fuel, et cetera, so with overall operating expenses still down $2.4 million.

Okay. Maybe we'll drill offline on that.

Okay.

And one more question, if I could. I guess, first of all, the new contract with Lowe's is a testament to, you know their belief in your staying power, and I think that the rally that we've seen in lumber and panels recently is due to, you know far less products in the pipeline, I guess, you know the warehouses and whatnot. How has the landscape changed since a number of people went out of business last year?

You know, Steve, it's changed significantly and still changing, and I'm sure there'll be more changes throughout 2010. But, yes, the-- I think through 2009-- and I shared on a couple of previous calls that there was destocking going on, you know as the markets contracted from their peaks in 2007.

I think that happened, you know, that the inventories were in a good position for most of the people in our industry late last year. And then as there was any activity increases, people needed to buy product. And that wasn't necessarily the case last year where there were so many store closures and folks moved inventory from, you know, a closing store to an operating store. And actual demand for our products and services last year were probably below the housing start numbers.

And this year I think that I guess I'd agree with what I was reading between the lines of the question in that all of that's cleaned up, and as houses are built today people need to buy product. And I think that's going to hold true for the rest of the year. So I think we're in a more normalized state today.

Great. Thanks very much.

Okay.

Your next question comes from Richard Skidmore with Goldman Sachs.

Good morning. This is Alex Ovshey on behalf of Rick.

Good morning, Alex.

Can you please quantify what the impact to volumes was from the GP contract rolling off?

I'm sorry, the impact of?

The impact to volumes from the Georgia Pacific contract rolling off in the quarter.

Well, the biggest impact to us was on the OSB side. So if you look at our volumes on Slide 14 you can see how much those volumes, the OSB volumes, which is a heavy direct business, fell off compared to the first quarter of last year. And that's really where it impacted us the most on that direct low-margin business with OSB.

Okay. That's helpful. And secondly, do you have a sense of what the impact of the poor weather was in terms of the bottom line for the quarter?

Well, February's a tough month, and we don't normally give a lot of guidance from month to month, but the quarter was really unusual. January was-- we started the year off pretty well, and February, you know, we track things. You know, we track everything but from shipping days in branches.

We had 43 branch days lost, so that meant 43 branches were closed for at least one day during the month of February. That's nothing outbound at all. You know, that's a significant portion in just a 20-day month. So it's a major impact. And then our expenses increased as well as we had to remove all that sun and then run through that business. And then March came back stronger, you know, and it was more on our January trend line.

So take February out, you know, January and March were more in line to what I think the normal environment would have been.

Okay. And just a follow-on--

If you look at housing starts-- I'm sorry, Alex. If you look at housing numbers, housing nar-- starts in February were rolling up 3.8% versus January and March, which were up in the 20s.

Okay. Got you. And just a follow-on to that, to the extent that you have this information can you talk to see-- to how you're seeing volumes through April or how you saw volumes through April and now into May relative to the volume numbers you reported for the first quarter?

We typically don't talk about the future, period, but I will go back to the first quarter, and as George alluded to, January and February were-- particularly February were tough months for us. And year-to-date February we were pretty much in line with prior-year sales on a year-over-year basis. It was flat.

So all of our increase on a quarter-over-quarter basis happened in March when the volumes really started to jump up, and that was also when prices started to rise as well. And that has continued into the second quarter.

Okay. That's helpful. And then just lastly on the gross margin, can you just talk to how you see the gross margin in the business developing as housing comes back, your volumes recover? If you will, can you talk to how you see the normalized gross margin in the business going forward?

Yes. The unusual thing about the first quarter is that our percent of sales from specialty to structural actually slipped a couple points from the trend line we were on, and that has to do with, you know, price, which is revenue, that's where we track. And then just early demand where folks say, well, we need to buy some structural products as things come back.

And I think that at-- the specialty products are traditionally higher margin, so as our specialty strategy continues to be executed, our margins will-- our specialty margins will increase, and the large majority of that business is at a warehouse.

The other impactful thing is, as you asked the questions on the OSB, OSB is a lower-margin product in our portfolio. Most of that ships direct. And as that business shrunk, that actually has a positive impact on our blended gross margins for the Company.

So we're focused on raising our margins. We're not going to give guidance on what our gross margin percentage is going to be, but we're working really hard to make sure that our margins improve and stay up there by product, by channel

Sounds good. Thank you very much for taking my questions.

Thank you, Alex.

Thanks, Alex.

Your next question comes from Alan Weber with Robotti & Company.

Good morning. First quick question was the tax refund that you had talked about I guess in the prior call. Did that come through in the second quarter?

Yes. We received $20 million in February.

Oh, in Feb-- oh, so it was in the first quarter.

Yes, first quarter.

Oh, okay. I thought it came through in the second quarter. Okay. My next question was when you look at, you know, your Company between, you know, increased housing starts and the seasonal increases, the increases to working capital, can you talk about both from your customer-- from your perspective in terms of your customers and your competitors whether you're seeing any that are not going to make-- you know, you see more bankruptcies (inaudible) an opportunity for market share? I may have missed that part?

Yes. You know, it's hard to predict what's going to happen. We've been-- we've had our fair share of change in the industry. There have been some folks leave, and, you know, that's often an opportunity for BlueLinx to grow our share, and it has been during 2009 and early 2010. As housing comes back, we expect that to be more impactful on our revenue line.

From a customer's perspective, we've had hundreds of customers go bankrupt. We're proud of the work that we did with managing our bad debt. As you can see in the numbers again this quarter we have very good bad debt performance, bad debt management performance. You know, and that's cost us some revenue because we've [locked on] some business where we think, you know, there's great risk for us, and I've shared that and certainly the last couple of years where we've played defense with accounts receivable.

We think the worse is behind us with accounts receivable. We think that most of the customers and competitors, quite frankly, that have weathered the storm, because they've run a good ship. And we don't expect significant increases in bad debt charges for 2010 and companies going out of business. However, I don't think we're done. I think there'll be some others.

And then as the market settles out, I think there'll be some consolidation, both with competitors and with customers, as things settle out and people can try to figure out how to value-- how to put values on these companies.

Okay. And then you talked about the Lowe's business. Is that-- did you pick that business up from a competitor, or is that a new product line at Lowe's? Did something change at Lowe's?

Yes. We picked it up from a competitor.

Okay, great. Thank you very much.

Thank you.

At this time there are no further questions. I would now like to turn the conference over to George Judd for closing remarks.

Okay. Well, thank you, everybody, for joining us. As I've shared, you know, we are seeing signs of light in the industry. We are seeing some settling of the housing markets, and we're optimistic for future quarters. Thank you all for joining us.

This concludes today's conference. You may now disconnect.