Bluelinx Holdings Inc (BXC) 2011 Q2 法說會逐字稿

Good morning. My name is Kimberly 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 4, 2011. Thank you.

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

Thank you Kimberly, and welcome ladies and gentlemen to the BlueLinx Second Quarter 2011 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 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 view them during our remarks. Additionally, the slide package contains an Appendix of Supplementary Tables available for your review.

Now, let me turn the call over to our Chief Executive Officer George Judd.

Good morning and thank you for joining us today.

Before beginning my remarks regarding the second quarter 2011 results, I would like to comment on our press release issued July 25, 2011 announcing the expiration of the subscription period for the previously announced $60 million rights offering. The rights offering was fully subscribed, and as a result, on July 28 BlueLinx received net proceeds of approximately $58.5 million from the offering.

The newly subscribed shares were issued on July 28, 2011, resulting in approximately 61.8 million total shares outstanding. During his prepared remarks Doug Goforth, our Chief Financial Officer, will provide a pro forma overview of the financial impact of the completed rights offering.

We thank all of our shareholders for their support, and while we are still receiving information on our shareholder population, post-rights offering Cerberus continues to hold approximately 54.5% -- the same percentage of shares held prior to the rights offering. Now I will turn the call over to Doug to begin the review of the second quarter results.

Thank you George and good morning everyone. I will start with an overview of the quarterly results. Then George will provide an operations review of the quarter and close with a final perspective.

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 second quarter ended July 2 totaled $500.8 million, down 7.4% or approximately $40 million from the second quarter of 2010. Specialty sales increased 10.7% year-over-year, reflecting a 16.5% increase in unit volume, partially offset by a 5.8% decline in product selling prices.

Structural product sales decreased 27.1% from the same period last year. This decrease was driven by an 18.9% decrease in volume and an 8.2% year-over-year decrease in product selling prices, as prices for wood-based structural products fell during the quarter. Specialty Products comprised 62% of total sales, up from 52% in the second quarter 2010 as we continued to focus on higher margin products and services. Overall unit volume declined 0.5% compared to the year-ago period.

Housing continues to underperform. Actual total US housing starts declined 4% for the second quarter 2011 compared to the same period last year with single-family starts, which represents our largest share, down 13.1%.

BlueLinx generated approximately $58 million in gross profit for the quarter. Overall gross margin was 11.5%, which is down 0.4% from the prior-year quarter. Structural margins of 8.6% were down compared to the prior-year quarter, reflecting competitive pricing pressures.

Specialty gross margin for the quarter was 14.4% compared with 15.5% a year ago, primarily a result of a channel shift from the warehouse channel and lower prices which were temporarily inflated in the year-ago period due to the Chilean earthquake.

Total operating expenses decreased to $59.4 million from $60.5 million a year ago as we continue to tightly manage our cost structure relative to business conditions. The decline in operating expenses primarily reflects decreases in variable compensation, depreciation expense and other items, partially offset by a $1.1 million increase in fuel expense.

The Company reported an operating loss for the second quarter of $1.8 million compared to an operating profit of $3.6 million in the prior-year period, reflecting a $6.5 million decrease in gross profit and a $1.1 million decrease in operating expenses. EBITDA of $0.7 million declined $6.3 million over the prior-year period driven by a decline in gross profit.

Our second-quarter net loss of $9.8 million or $0.31 per diluted share compares with a net loss of $3.4 million or $0.11 per diluted share in the second quarter of 2010. Our reported net loss for the period is after interest expense of $7.7 million compared to interest expense of $6.9 million in the prior-year period, which included $1.3 million in pretax non-cash interest income associated with our interest rate swap. The current year net loss is after a tax provision of $158,000 compared to an immaterial tax provision in the year ago quarter.

Looking at year-to-date results on slide six, sales for the six months ended July totaled $894.1 million, down 8.3% from the same period last year. Gross margin of 11.7% decreased from 12% in the year-ago period. Year-to-date reported operating expenses, which included $7.2 million in real estate gains, decreased 8.3% from the same period last year.

The resulting operating loss of $6.9 million was largely driven by the housing-related drop in demand. EBITDA declined $4 million over the prior-year period due to the decrease in gross profit, partially offset by real estate gains and operating expense decline. The year-to-date reported net loss of $22.1 million or $0.71 per share compares with a net loss of $18.1 million or $0.59 a year ago.

Turning to cash flow on slide seven, during the quarter we used $38.3 million in cash from operating activities, primarily reflecting seasonal increases in accounts receivable of $35.8 million, partially offset by inventory decreases of $7.7 million during the month of June as we right-sized levels to the current environment. And net decreases in accounts payable and other current items. This compares with net cash used by operations of $34.3 million in the second quarter of 2010.

Cash used in investing activities was approximately $1.6 million, primarily reflecting investments in our branches including our new facility in Nashville. Cash provided by financing activities was $39.8 million for the quarter, driven by a $48.4 million increase in outstanding borrowings under our revolving credit facility, a $6.9 million decrease in bank overdrafts and a $1.6 million increase in restricted cash related to the mortgage.

For the first half of 2011 we used approximately $101 million of cash for operating activities compared to approximately $81 million in cash during the year-ago period, which benefited from a $20.2 million federal income tax refund.

Cash provided by financing activities during the first half of 2011 was $89.4 million, driven by a $91.7 million increase in outstanding borrowings under our revolving debt facility, a $7.8 million increase in restricted cash related to the mortgage, and $5.8 million increase in bank overdrafts. This compares to $70.8 million used in financing activities driven by a $68.7 million increase in borrowings, a $9.9 million increase in bank overdrafts and a $6.6 million increase in restricted cash related to the mortgage for the similar year-ago period.

The resulting cash balance at July 2 was $6.1 million compared with $18.8 million a year ago.

Moving to slide eight, we had approximately $94 million of excess availability under our revolving credit facility as of quarter end. The combined debt balance on our mortgage and revolving credit facility was approximately $474.6 million, an increase of approximately $49 million from the first quarter profit 2011. Net debt at the end of the second quarter was approximately $430 million compared to $383 million at April 2, and was up approximately $65 million from a year ago.

Subsequent to the end of the quarter, the previously announced $60 million rights offering closed. Slide nine presents a pro forma second-quarter balance sheet reflecting the rights offering.

On July 28, 2011 we issued approximately 28.6 million shares and received $60 million in gross proceeds from the rights offering. $56 million of proceeds from the rights offering were used to immediately pay down the revolving credit facility. In conjunction with the rights offering, we negotiated an amendment to our mortgage agreement which in part allowed for the release of $38.3 million in escrow funds held as collateral under the mortgage agreement, saving $2.4 million a year in interest expense.

The released cash was used for an immediate prepayment on the mortgage loan without incurring a prepayment penalty. Also in conjunction with the rights offering, we negotiated an amendment our revolving credit agreement which became effective on July 29, 2011.

On a pro forma basis, assuming these transactions had occurred at the end of the second quarter, the combined debt balance on our mortgage and revolving credit facility would decline by approximately $94 million to $380.3 million. Our net debt would fall to $374.2 million and excess availability would be approximately $155 million.

Turning to slide 10, cat cycle days for the second quarter totaled 58. That compares with 55 days for the first quarter of 2011 and 49 days compared to the same period one year ago. The increase in cat cycle days was driven by both the build of inventory in anticipation of a stronger spring selling season and higher levels of Specialty product.

We continue to balance inventory levels with the weakening demand environment, while also continuing to support strategic product and vendors as part of our ongoing focus on Specialty product growth.

That concludes my prepared remarks. Now let me turn the call over to George.

Thank you Doug. Before I comment further on the quarter, I would like to talk about the recently released housing data.

According to the US Commerce Department, June housing starts increased 14.6% sequentially to a seasonally adjusted annual rate of 629,000 units, the highest level since January, as groundbreaking for multifamily units increased 31.6%. Many economists believe that the shape of the housing recovery is starting to form and [we believe] that it will be one in which multifamily market recovers before the single-family home market recovers. I also believe that the multifamily segment will lead the recovery market by market.

While BlueLinx is more closely tied to the single-family housing market, we also participate in the wood frame multi-family segment. High-rise multifamily is less significant for us.

The report also showed gains in the construction of single-family homes. Regardless of which market recovers first, any pickup in housing is good for BlueLinx. And it certainly is our intention to participate in this recovery.

BlueLinx's operational performance in the second quarter, while impacted by the continued difficult conditions of the housing and construction markets, benefited by our ability to execute on our Specialty Products strategy. In our Specialty business we saw unit volume growth led by product lines where we have strategic growth initiatives.

Overall unit volume grew 16.5% as we executed these growth strategies. We have said on previous calls, this recovery is unfolding market by market. And we intend to expand our share in the recovering markets by targeting specific customers and products in specific markets.

Specialty sales as a percentage of total revenue reached 62% in the second quarter, surpassing our long-term goal of 60%. Specialty revenue grew 10.7%, expanding across all distribution channels [and] both reload and direct channel business showing strong year-over-year growth.

Gross profit increased $1.2 million or 2.8% on margins of 14.4%. We will continue to focus on increasing our Specialty Products revenue, growing well above the 60% target.

Our Structural business had a more difficult quarter. Structural unit volume declined 18.9%. As we focused on maintaining margin in a falling price environment, we saw the average prices of key grades of lumber, plywood and OSB decline approximately 12% from the end of the first quarter and 20% from the year-ago quarter.

While committed to servicing our customers' structural product needs we focused on inventory turns and fill rates as structural wood product prices declined. We had product available to sell, but managed our margins versus unit volume growth and achieved a reasonable margin of 8.6% while providing our customers with the products they needed. Prolonged market declines are a difficult environment in which to achieve acceptable margins.

We continue to make appropriate investments in people and processes to help ensure our success as we move forward in 2011 and beyond.

Recently I made the decision to realign all of the sales operations for the East and West to report to Joe Kastelic, our new Senior Vice President of Sales. Joe joined BlueLinx in May of last year as Senior Vice President of our Denver sales center. In his new role here in Atlanta, he will oversee sales operations for the entire Company.

We'll continue to refine and adjust our management team to support our market strategies and provide best-in-industry service to our customers and vendors.

We are also making investments in processes and systems that will make it even easier for customers to do business with BlueLinx. During the quarter we rolled out several pilot markets and our new e-commerce platform branded My BlueLinx online. This new e-commerce initiative provides our customers with 24/7 access to their transactional data and shipment notifications to an online, easy to use and navigate website.

Customers are adapting well to the site and have -- are excited to provide this -- we're excited to provide this enhanced capability to our customers. Future phases will include e-catalogs and online purchasing to further enhance our customer service levels.

In summary, we believe the second quarter performance demonstrates that BlueLinx is operating effectively in a tough environment. We continue to strengthen our long-term value proposition with customers and vendors by maintaining appropriate margins and declining to participate in less than profitable businesses. We're making key investments in inventory, sales and systems, and we're focusing resources on our Specialty product growth initiatives.

Our long-term objective continues to be to grow Specialty Products to more than [60%] of our total sales and we exceeded this goal school during this quarter. We will continue to execute against this goal, working hard to achieve sustainable and profitable Specialty growth. We will continue to manage our Structural business for profitability and focus on value-added products within our Structural family of products.

With that, we will open the call to questions. Operator, would you please instruct everyone on how to ask questions?

(Operator Instructions) Alan Weber, Robotti & Co.

Good morning. [I just have] a few questions. One is when you talk about the Structural and Specialty Products, have you ever had such a change in volume? And it is unclear why there's such a percent change. In Structural has something changed there where you've lost market share, or can you explain that?

Yes. Structural business, Alan, during the quarter -- last year we had substantial increases in price which drove demand. So last year we had the housing tax credit, which inflated demand for some Building Products earlier in the year. We did not have that this year.

Then we had that inflating pricing impermanent which always drives an emotional demand increase. So we did not see that this year.

The second thing is we had a prolonged 12 weeks of continuous price decline. And when the price is falling 12 weeks in a row, we have to really tightly manage our inventories and manage our margin expectations. We don't want to grow our volume in a declining price environment.

Many times the products that we're procuring have three or four weeks of leadtime to our facility. So if we buy it today, it comes in four weeks and it's worth -- four weeks' worth of market decline less than when we bought it, we're in a negative margin position. So it's important for BlueLinx to manage our inflows and our outflow of commodity Structural products in those declining periods and we did that.

So we did pass on some business. We probably did lose some share during the quarter. But it would have been less than acceptable margins for BlueLinx to make a profit.

Okay. And then as you talk about that, can you talk about as you see it changes kind of on the competitive environment, just given whether you have seen any -- on a local basis other distributors out of business or where that stands?

Well, it's a difficult business for everybody and we have seen some competitors pull back. We've seen people close different facilities in different markets.

But obviously one of the things that I continue to be surprised at is the staying power for many of our competitors. It is very, very difficult and it is why I'm pleased with our margin performance during the quarter, because it's tough out there. And all the competitors are fighting over a much smaller pie.

So we're pressing our margin, and that is also why earlier last year we talked about special targeted programs, special customers and specialty products that we're focused on. It's not everything. It's the areas where we think there are opportunities for BlueLinx to gain share at acceptable margins. And that is where we have dedicated our resources it's where we're showing our results.

Okay. And my last question is do you talk about -- now, I know you don't really give projections. But kind of what you expect -- the cash flow relative to last year, if your cash flow is flat with last year's second half, you really consumed quite a bit of cash this year which kind of almost offset the bulk of the rights offering. Just curious how you see the cash flow for the balance of the year relative to last year.

This is Doug. Again if you look at our first-half cash usage, it is in line with what we used last year if you take out the tax refund that we received last year. In the second half of the year we always generate cash as you bring down working capital, etc. So our expectations right now is that our cash usage for 2011 will be slightly higher than 2010.

We always have a proviso on that because if the business environment starts to pick up, we could make some strategic purchases an inventory, etc. to take into the beginning of 2012.

Okay, great. Thank you very much.

Steve Chercover, DA Davidson.

Good morning everyone. You actually answered some of my questions. But just -- Doug, on your last comment you could make some strategic inventory acquisitions. That doesn't entail speculating, does it?

No, no.

You would just lay in if the prices were very, very (multiple speakers)

There's always different opportunities at the end of the year, Steve. There could be -- there is always somebody out there with [winner buy] promotions. And if we believe that the price is right on those and the [bills] that go along with that make sense for BlueLinx, then we could participate in that.

We always participate in some form or another of winner buys. But you can put $1 million into a winner buy programs or you can put $10 million into several winner buy programs.

(inaudible) commodity side, Steve. This is the Specialty side of the business. One of the values we provide for many of our manufacturing partners is helping them level-load their production.

So, if they're producing product later this year for the spring season, and they make it so -- make the deal so that it is favorable for BlueLinx to purchase that product in December versus February, when we might needed in March, we do participate in these programs.

Got it. Thanks. Now, how are business trends in July versus the second quarter?

Well, I mean, business is still struggling out there. It's slow. Our trends are consistent with the latter half of the second quarter. And the latter half of the second quarter was better than the first half, but it's still tough out there.

I see. Now that you have hit your target of 60% on Specialties, are you going to reassess targets at all? Or you just want to grow the overall pie?

No, we are going to reassess the target. We will move that target up. We will move that target up and announcement what that target is after we have a couple quarters where we beat it.

Because we did have a struggling Structural quarter, which we talked about, and that was due to pricing and strategy on our part. So that skews the number somewhat, but we like that 16% growth, 16.5% in Specialty. If we see that sustained, which I'm counting on our team to produce those results, then we will up the target.

Very good. Over the last several years your relationships with Georgia-Pacific has kind of changed. So, overall, on the Structural side have you got a lot of new suppliers? I mean is the landscape very different?

Yes, we do business with all of the major forest product producers including some that the market views as competitors. But Georgia-Pacific is still a very large supplier to BlueLinx and where we add value we do a lot of business.

Okay. Just a couple more if I could. Your unit volume was only down 0.5% in the quarter. And when you compare that to the decline in housing, it seems like you actually outperform. But I think you said you may have lost some share. So can you reconcile that?

Well, it's just on the Structural side, right. So, on the Structural side of the business we didn't chase a lot of business, so there is always that noise on inventory -- what the inventory levels in the channel are.

I don't think that BlueLinx maintained or gained our share on the Structural side of the business during the quarter, simply because of the business we passed on. We could have taken a lot more business. That business was out there and we didn't take it, and I view that as share erosion. Somebody took it.

Got it. Final one and this is kind of a broad question. Obviously you've been working hard to address the balance sheet and you paid down $56 million worth of debt, and you have more liquidity currently than you ended the quarter. So how would you characterize your relationship with your lenders? Are they still very supportive?

Extremely supportive, particularly on the ABL side. The bank group was very supportive of our efforts. We've been working on this whole rights offering process, including ABL and mortgage amendment, since January. And we pretty much had everything agreed to with the ABL lenders in May and signed off on that and was just waiting for the rights offering to close.

But the changes that we got on the ABL, particularly some tweaks to the advance rates, etc., as I look out there to companies who are in this space that have publicly provided information, our advance rates particularly in accounts receivable and inventory are up there at the top. So, we do an extremely good job of managing our accounts receivable and inventory, and they see that and worked with us because of that.

Great. It seems like you guys are doing everything right in a really tough environment. Thanks for taking my questions.

I would now like to turn the conference back over to Mr. Judd for closing remarks.

Okay, thank you operator. In closing, I would again like to thank our shareholders for their continued support, and to thank our employees. They have been working very, very hard and safely and very effectively in a difficult market. I appreciate that every day.

And I thank everybody for attending our call. We look forward to talking to you next quarter.

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