Bluelinx Holdings Inc (BXC) 2010 Q3 法說會逐字稿

Good morning. My name is Thea, and I will be the conference operator today. At this time, I would like to welcome everyone to the BlueLinx third-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 call is being recorded today, November 4, 2010. Thank you. I would now like to introduce Maryon Davis with BlueLinx. Ms. Davis, you may begin your conference, ma'am.

Thank you, Thea, and welcome, ladies and gentlemen, to the BlueLinx third-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 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 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 use 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, George Judd.

Thanks, Maryon. Good morning, and thank you for joining us today. Before beginning our remarks regarding the third-quarter 2010 results, I would like to comment on the termination of the tender offer for the outstanding shares of common stock of BlueLinx Holdings Inc. by Cerberus ABP Investor LLC, or CAI. As previously announced, because CAI did not receive a tender of 90% for the outstanding shares, CAI decided not to close the tender offer. This means that all shares that had been tendered will be returned to the stockholders who own the shares, and the status of BlueLinx as a publicly-traded company will not change.

During the tender period, we continued to focus on our strategic priorities in this difficult building products market. Our priority was to stay focused on our business and to minimize any distractions to our customers, suppliers and employees. We are pleased to have the support of the investment community, and with this distraction behind us, will continue to work and earn your support in the coming years. Thank you for your support, and with that, I would like to turn to call over to Doug Goforth, our Chief Financial Officer.

Thanks, George. Good morning. I will start with a brief overview of the quarterly results, followed by a more detailed financial review. Then George will provide an operations review of the quarter and close with a final perspective.

Let's begin with the quarterly overview. During the quarter, we continued to feel the effects of volatile wood product markets and a weak economy. Average benchmark wood-based structural prices increased approximately 12% from the third quarter of 2009 to the third quarter of 2010. On a sequential quarter basis, product price volatility, which began in the second quarter of 2010, continued to impact our results, as average prices declined approximately 20%.

Housing continues to remain weak in the wake of the expiration of the Government's housing tax credit. Total housing starts in September were at a seasonally-adjusted annual rate of 610,000 units, and were 4.1% above the September 2009 rate. Actual total US housing starts declined 0.8% for the third quarter 2010 compared to the same period last year, with single-family starts, which our business is closely tied to, down 13.5%.

The numbers suggest that the market for new home construction is stabilizing. However, it remains incredibly low by historical standards, with current rates approximately 66% below 2006's peak. The environment for home building and home remodeling continues to face substantial headwinds, with an overhang of inventory, low consumer confidence and high unemployment.

Despite the decline in actual building activity, our sales of approximately $465 million were up 3.4% from sales of approximately $449 million in the third quarter of 2009. Overall, unit volume declined 1.2% compared to the year-ago period. Specialty volume grew 1.3%, as we continued to focus on increasing our share of value-added products.

Structural products volume declined 4.3%, as demand for these products softened during the quarter and we lowered our own purchases to limit our exposure to rapidly falling demand and prices.

Overall, gross margin was 10.7% for the quarter, down from last year's 12.3%. Structural margins contracted to 7.4% from 10.6% in the prior-year quarter as a result of the sharp decline in the prices for these products during the quarter. Specialty margins at 14.4% were 0.8% below the prior-year period, but remained above recent annual historical levels.

For the third quarter of 2010, we reported a net loss of $14.9 million, or $0.48 per share, on revenues of $464.7 million. During the quarter, we generated $33 million in cash from operations and we had approximately $143 million in excess availability at the end of the quarter, with a cash balance of $12.9 million. Our net debt was approximately $347 million, down $19 million from the previous quarter.

Now for a closer look at the 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 five.

Overall, sales for the third quarter ended October 2 totaled $464.7 million, up 3.4%, or approximately $15 million from the third quarter of 2009. Specialty sales increased 2.5% year-over-year, reflecting increases in both volumes and pricing.

Structural product sales increased 5.9% from the same period last year. The increase was driven by a 10% year-over-year increase in product selling prices, partially offset by a 4.3% decrease in units sold. Specialty products comprised 55% of total sales, slightly down from 56% in the third quarter of 2009.

BlueLinx generated approximately $50 million in gross profit for the quarter. Gross margin was 10.7%, which is down 1.6% from the prior-year quarter. Both specialty and structural margins contracted relative to the prior-year quarter, as we continued to feel the effects of the volatile wood markets, high-priced inventory and a slowdown in demand.

Not only are our structural products impacted by movements in the wood market, but portions of our specialty business, which include specialty lumber and other wood-based products, are also impacted when we see extreme pricing volatility.

Operating expenses for the quarter totaled $57.2 million for a decrease of $1.7 million, or 2.8%, from a year ago. Operating expenses for the current quarter included three significant special items. First, we received $5.2 million for a litigation settlement. Second, we incurred $3 million in legal and other professional fees associated with the terminated tender offer. And third, we recorded approximately $300,000 in severance costs related to changes in our western operations that George will comment on later in the call.

After adjusting for the significant special items, operating expense increased approximately 10 basis points compared to a year ago, while our out-of-warehouse revenue, which impacts our logistics costs, increased approximately 170 basis points. The overall level of expenses in the quarter reflects the Company's success in growing revenue faster than our operating expenses.

The Company reported an operating loss for the third quarter of $7.3 million compared to an operating loss of $3.6 million in the prior-year period, reflecting a $5.4 million decrease in gross profit and a $1.7 million decrease in operating expenses.

Our third-quarter net loss of $14.9 million, or $0.48 per diluted share, compares with a net loss of $13.5 million, or $0.44 per diluted share, in the third quarter of 2009. Our reported net income for the period after interest expense was $8.1 million, which includes $1.2 million in pretax, non-cash interest income related to our interest rate swap, compared to interest expense of $9.4 million in the prior-year period, which included a $1.4 million pretax non-cash charge associated with our interest rate swap.

The current-year net loss is after a benefit of $778,000, which includes a tax refund of approximately $660,000 related to our 2009 amended return, compared to a tax provision of $120,000 in the prior-year period.

As discussed on prior-year calls, 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 consist of income taxes on earnings of Canadian operations and certain state income taxes, but generally will not include any income tax benefit related to its US operations.

Looking at year-to-date results on slide six, sales for the nine months ended October 2 totaled approximately $1.4 billion, up 12% from the same period last year. Gross margin of 11.6% equaled the year-ago period. Year-to-date reported operating expenses increased approximately 12% from the same period last year, with both the 2010 and 2009 periods benefiting from net gains from significant special items of $1.9 billion and $20.1 million, respectively. The resulting operating loss of $11.7 million compares to an operating loss of $11.5 million for the year-ago period.

EBITDA declined $3 million over the prior-year period, reflecting increased gross profit and the unfavorable impact of operating expense increases which resulted from net gains on significant special items in the prior-year period.

The year-to-date reported net loss of $33 million, or $1.08 per share, compares with a net loss of $73.5 million, or $2.37, a year ago.

Turning to cash flow on slide seven, during the quarter, we generated $33 million in cash from operating activities, which compares with net use by operations of $6.3 million in the third quarter of 2009. As we have stated on previous quarterly calls, we are highly focused on tightly managing our working capital items, while serving the needs of our customers, suppliers and shareholders. We believe our third-quarter results reflect these efforts, as we took steps to make sure our inventory remained in line with declining demand.

Cash used in financing activities was approximately $37 million for the quarter, driven by a $23 million increase in outstanding borrowings under our revolving credit facility, a $6 million decrease in bank overdrafts and $6 million of debt financing costs related to the extension of our asset base lending facility to January 2014. The resulting cash balance at October 2 was $12.9 million compared with $25.5 million a year ago.

Moving to slide eight, we had approximately $143 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 approximately $388 million, a decrease of $22.7 million from the second quarter of 2010. Net debt at the end of the third quarter was approximately $347 million, compared to $366 million at July 3, and was up approximately $48 million from a year ago.

Turning to slide nine, cash cycle days for the third quarter totaled 51. That compares with 49 days for the second quarter of 2009, and improved one day compared to the same period a year ago. Our performance in this area reflects our daily efforts to manage our working capital risk.

Now, let me turn to call back over to George.

Thanks, Doug. The third-quarter business conditions remained challenging for our industry and for BlueLinx. As I said previously, we can't control the external environment, but we can work hard to manage those things we can control, and that is what we did in the third quarter.

We grew sales in an extremely difficult market, with both specialty and structural revenue growing over the prior-year period. We aggressively managed our operating costs, we managed our cash flow well, generating cash from operations in the quarter, and we continued to provide superior service to our customers and our suppliers. And we continued to position BlueLinx for success as the business increases with economic recovery.

We grew third-quarter sales 3.4% over the same period last year in a weak environment that saw actual total housing starts decline 0.8% and actual single-family starts -- and you know that is a large percentage of our business -- decline 13.5%. On a year-to-date basis, we've grown sales 12%, while actual housing starts have increased 8.5%.

The overall level of expenses in the quarter reflects our focus on growing revenue faster than our operating expenses. We aggressively managed our operating costs. After adjusting for significant special items, our costs were up only 0.1% for the third quarter and 0.2% year-to-date compared to the same periods last year. So year-to-date, we've handled 12% more business and increased our costs by only 0.2%.

We maintained our focus on cash flow during the quarter. We entered the quarter anticipating a seasonal upswing in sales and sized our inventory levels accordingly. When the seasonal upswings didn't materialize and prices for wood-based products fell, we worked hard to manage our inventory levels to the current demand environment, generating approximately $31 million in cash flow.

We curtailed certain inventory purchases during the quarter, as we sought to improve our margins and reduce our inventory exposure. Our inventories are costed at market, and I'm very happy with our inventory position. Our inventories are clean, salable and costed at market.

We've continued to tightly manage our accounts receivable portfolio and our credit approvals to ensure that we are selling to customers who will pay us in a timely manner. We work together with our customers to evaluate and adjust credit terms as needed, and we will continue to do so in the coming months. We have aggressively managed inventories, receivables and kept tight controls on our cost structure without diminishing our ability to achieve our business objectives.

During the quarter, we continued our commitment to build strong alliances with strategic vendors and to provide valuable service to our customers. We will continue to utilize our extensive national logistics and warehousing capability to grow traditional building product businesses and explore opportunities outside of our traditional customers and products.

For example, we recently began distributing some of the most recognized and respected products in solar technology through our portfolio brand, PureSky Solar. We are one of the first to bring this opportunity to our building product customers, making solar products more attainable to homeowners and builders through one source. Currently, we have sales in solar products in approximately 20 markets across the country. We continue to look for ways to improve the efficiency of the supply chain through global sourcing opportunities and through enhanced domestic partnerships.

Now, I would like to take this opportunity to update you on further changes we've made in our Western operations. As announced last quarter, we hired a new senior leader for this region, and after months of review and detailed assessment to determine how to best improve the operational performance of the region, we have made additional organizational changes. These changes are designed to bring BlueLinx closer to the markets we serve and to enhance our customer focus.

Our strategy is to continue to be a national distributor, serving all major markets. With these changes, we are well-positioned to provide the superior customer service our customers expect. We continue to look at all markets and businesses within BlueLinx, and will make necessary changes and investments to improve our results.

There continues to be uncertainty around the macroeconomic factors that drive our business. And while the short-term environment is difficult, I believe housing will recover as employment grows again, and along with the general economic recovery. Our management team, our Board of Directors and our shareholders continue to believe in the long-term strength of the housing market.

We expect a challenging fourth quarter, which historically is slow for our housing-related businesses. Nevertheless, we believe we have taken the steps necessary to continue progressing in this environment towards our long-term objectives.

In closing, we can't control the external environment, but are going to work to ensure our Company is well-positioned in this challenging environment and ready to capitalize on opportunities when business resumes to a more normal pace. I believe the actions and decisions we are making each day position BlueLinx to win in the long term.

With that, operator, I would like to open the call to questions.

(Operator Instructions) Steve Chercover, D.A. Davidson.

Good morning, George and Doug. I guess my first question is you're mortgaged at 6.35% through 2016. And maybe this is a difference between commercial and residential mortgages. Can you lower your rate on that?

We would have to go out and refinance, but at 6.35%, we are not -- that is not something that we currently have on the table, Steve.

Okay, so (multiple speakers)

There are other things within that mortgage as well. You know, you would have to do prepayment, yield maintenance penalties to pay it off, et cetera. So it wouldn't make sense for us at this point.

I'm sure you've done all the math behind that, so -- it just seems as a -- I guess a residential mortgage holder, people can do better. But that's (multiple speakers).

Absolutely, on a residential basis you can do better. Again, with our mortgage, right now, the yield maintenance, which is based on seven-year Treasuries, is in the high 20%. You have a yield maintenance penalty up front, and then you -- to pay that mortgage off. And again, the math just doesn't work. And I'm not even sure how much we could get -- how much we could improve 6.35% if we even could, because it is a commercial property.

Great. Thanks. And staying as a simpleton, can we simplify your lack of profitability as there just isn't sufficient volume across the system to make any given jurisdiction profitable? Is it a volume problem?

As a company, the answer is yes, it is a volume problem. We have a difficult time constantly adjusting to make our company profitable at the housing market that is given. So 600,000 starts, we obviously were unable to generate a return.

However, I am not sure if I just heard this or -- the question is, regard to some markets, the majority of our markets are profitable. And that is why we are making -- aggressively making some changes with our team and with our structure and constantly tweaking to help those facilities in those markets that are not profitable. And we continue to invest in those. But the vast majority of our facilities are making a positive return for us.

Okay. (multiple speakers).

(multiple speakers) some markets that are just losing a lot of money.

As the bottom line for the corporation in general, that you aggregate all of the distinct distribution centers and it's insufficient to bring the entire corporation to profitability, I'm just wondering what can be done. Because I believe that if you guys can't make money, then no one is probably making money distributing building materials. But yet, I believe it is ultimately an essential service. Someone's got to do it.

We've got to grow our specialty sales at a faster rate. Thus, the reason for many of the changes that we are making. That curve, we are growing, and we are growing in most markets at a constant pace. We've got to accelerate that pace.

That, and this quarter -- I've been doing this a long time, as you know -- I haven't seen structural prices decline at any rate anywhere near what we saw during this quarter. And although we turned those inventories very quickly, you know, we had negative margins in most markets on our structural products for periods during the quarter. And that drug our margin down considerably, as we did go into detail on our structural margins and how far those had declined.

And then normally -- in a normal range of structural price volatility, the impact on our specialty business is small. But when some wood prices fell by half through the quarter, those price declines carried into some of our specialty businesses, so we saw a drain on our specialty margins.

But if we -- our strategy is quite simple. We need to grow our specialty business. We need to get paid for that service. And we need to limit our costs, and we can be a profitable company. And I think that is what we are on -- that's our plan. That's what we spend all our time trying to achieve. And this quarter, we certainly had a major curveball with this pricing dilemma that we had.

Well, we certainly do live in interesting times. If you could throw out a single point where you believe the top line would be sufficient to generate profitability for the Company in aggregate, would that be $2.5 billion or --?

A revenue point?

Correct.

It all depends on the mix, right? We could be $2.5 billion and lose more money if we grew our specialty business in a volatile time. So it really has -- it is more complex than that. We really have to grow that specialty business to continue to do that. But we don't need a lot of room to make up those losses that we incurred during the quarter.

Okay. My final question is how would you characterize the dynamic in the Boardroom these days or at Board meetings? I mean, previously, I think you characterize Cerberus as being a supportive majority shareholder. Given what has transpired over last three months or so, is that still how they are?

Yes, absolutely. I think if, anything, it just showed their belief in the Company. And we have a Board meeting next week. We are expecting it to go very well, and Cerberus has never been anything but supportive for BlueLinx.

Great. I'll turn it over. Thank you.

Alan Weber, Robotti & Company.

Good morning. When you made a comment about most of the markets are profitable, or most of your -- I guess your warehouses are profitable, is that kind of at the -- is that before you kind of factor in corporate allocation and interest? What did you mean by that, actually?

The reality is that we have facilities in many markets that are profitable no matter how we allocate corporate costs. We have some that are in the middle, that are -- when we allocate corporate costs or we don't, which we have to pay for our corporate costs, become unprofitable.

But we have some facilities that even if we don't allocate corporate costs are unprofitable, and we are spending our time making sure that business grows, that those businesses improve. And that is where we spent a lot of time with some leadership changes, some product mix changes and even some structure changes in the last five or six months to change that outcome. And as the market comes back, those will be very successful businesses.

One of our -- one of my strategic beliefs is that we have to be a national distributor to serve our national customers. And the national customer base is a growing group, whether it is Home Depot or Lowe's, or whether it is the ProBuilds and the Builder's First Sources and the Stock Building Supplies, the 84 Lumbers. The large customers that carry -- that cross large markets, we have to have a good service proposition for all of them, and it's our responsibility to our shareholders to make sure we make money in all those markets. So we are trying to stay in that and keep our national footprint and make sure every one of those markets contributes to our earnings.

On just that note, is it -- in some of the markets where you are not profitable, is it just really due to the substantial -- even more than the 66% decline because housing starts aren't down equally in all markets, so it's just because some markets are down so much? Or is it just something in those markets that make it more difficult to operate?

Both. There's lots of factors. There are markets that -- California and Florida and Vegas and Phoenix and places like that that we all read about and hear about that are just really, really tough housing markets. There are other markets that didn't fall as quickly.

But, that being said, I don't know that we've done everything in every market as quickly as I would have liked, and thus, the need for some change. So there is always opportunity. There is opportunity in our most successful markets to do better, and that is what we are trying to do.

I think that part of it has to do with our share in those markets. If our share is higher, then even if it is a smaller -- even if there are fewer starts or fewer opportunities, if our share is higher, then our results are better. We have got to grow our share in some of our underperforming markets.

You made a comment about the customers being more national. Can you just talk about the competitive side in terms of your business, given the downturn whether you've seen -- are there any that have gone out of business, or just -- so when and if the recovery comes, you should get your share of revenues?

I guess I'll elaborate on the comment. There are a large group of customers that are national, or multi-regional, and we need to serve those customers. Actually, we see a resurgence of the independent lumber dealer in many markets where they may have sold to a consolidator and they are reopening as an independent location or a family-owned business again. So we are seeing some of that.

But the opportunity, as things come back, we've had hundreds -- thousands actually -- of customers close locations. And we've had hundreds go out of business. So there are far fewer retail lumber outlets in North America today than there was in 2006, certainly.

And when business comes back, that business will be with fewer customers, and those are the customers that were able to successfully navigate this housing market that we've had for the last 4.5 years (multiple speakers).

I understand that. Also on the competitive side, in terms of other competitors of distributors, have you seen a reduction in the number of actual distributors?

Yes, we've seen smaller regional in some markets close. We've actually seen more of that recently than we have in the last couple years. We have many of our competitors that have left certain markets, and they have shrunk their footprint from multiple locations to just one or two or a handful.

So there is definitely pain being felt by all of our competitors, and they are all running their business to the best of their ability and making those decisions that suit them best. And it is ever-changing. It changes every day.

My last question was, when you talk about the specialty products becoming 60%, assuming flattish pricing or more moderate pricing, with that, we would get a higher gross margin percent. Is that correct?

Yes, and we've seen that. If you go back through BlueLinx's history, you've seen as our specialty business grow and our blended margin increases.

Okay, great. Thank you very much.

There are no further questions at this time. I would like to turn the conference back over to Mr. Judd for any closing comments.

Okay, good. Thank you all for joining us today, and I want to thank you for the questions. And we look forward to speaking with you again next quarter.

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.