Bluelinx Holdings Inc (BXC) 2012 Q3 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 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 is being recorded today, Thursday, November 1, 2012. Thank you. I would now like to introduce Maryon Davis, Director of Investor Relations with BlueLinx. Please go ahead.

Thank you, Kimberly. And welcome, everyone, to the BlueLinx third quarter 2012 conference call. Our speakers 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 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.

We will begin the call this morning with opening remarks from George, then Doug will present and in-depth review of the financial statements. Next, George will provide an operations review of the quarter and add a final perspective before opening the call to your questions.

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

Thank you, Maryon. Good morning, ladies and gentlemen. Thank you for joining us this morning. Everyone at BlueLinx extends their deepest sympathy and concern for those impacted by the storm earlier this week. Thankfully, our BlueLinx employees are safe and our facilities are all operational, sustaining only minor, limited damage.

Doug and I have spent an increasing amount of time recently talking with a variety of people interested in learning more about BlueLinx and the future opportunities of our company. We're always excited by this interest and welcome new listeners to today's call.

To assist all of our investors and other interested parties, we have posted our latest investor presentation on our website and we encourage you to review it and learn more about our company, our history, our industry and our strategy, and many opportunities the future holds for BlueLinx.

Before I turn the call over to Doug to review the financial results, I'll briefly review our current business objectives. Specifically, we're pursuing specialty product growth with a continuing sense of urgency and commitment. And we are managing our structural business for overall profitability, not for volume or not for market share.

Let me elaborate further on these BlueLinx strategic objectives. We have consistently said our primary strategic objective remains to grow specialty building products revenue to more than 60% of our total sales. Specialty products accounted for 58% of total sales in the third quarter and 65% of total gross margin.

Our growth objective for specialty is based on two key facts. The first is that specialty building products generally are less volatile and carry higher margins than structural products, which translates to more stable earnings growth and higher profit margins.

The second is that our focus on the specialty category distinctly differentiates BlueLinx in the supply chain by positioning us to create significant value for both the manufacturers of these products and our customers. Now let's look at the structural products part of the business.

Our structural products business is a vital part of BlueLinx and we continue to refine our systems and processes to manage this business for long-term profitability. Our second objective is to continue to grow our structural products business but with emphasis on profitability and limited exposure to commodity price volatility.

We have focused on reducing our exposure to the volatility inherent in structural commodity prices through more effective inventory management, increased program sales and the use of consignment inventories. In summary, our growth objectives and our strategy for reaching them are clear and consistent. Our progress is steady and our commitment is great.

Now I'll turn the call over to Doug. Doug?

Thank you, George. Good morning. Turning to the financial highlights, as Maryon indicated earlier, this morning we released our third quarter 2012 results. For those who may not have seen our third quarter numbers yet, let me offer a quick recap.

Revenues for the quarter were $496.8 million, which was up $23.9 million or 5.1%. Operating profit was $10.3 million and that represents a $9.1 million increase. Net income was $3.1 million, which was up $9.3 million, and earnings per diluted share were $0.05 this quarter, compared to a loss per diluted share of $0.12 in the third quarter of 2011. I'm very pleased to say that represents our first quarterly profit since 2009.

BlueLinx generated approximately $23 million in cash from operations for the quarter, which is a $6 million increase over the same period last year. Finally, we had approximately $112 million in excess availability at the end of the quarter with a cash balance of $7.9 million. Our net debt was approximately $387 million, up approximately $30 million from a year ago.

Now for a closer look at the quarterly and year-to-date 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 6.

Overall, sales for the third quarter ended September 29 totaled $496.8 million, up 5.1%, or $23.9 million, from the third quarter of 2011. The increase reflects a 0.8% decrease in specialty product sales and a 13.3% increase in structural product sales from the year ago period.

Third quarter sales mix was impacted by increased structural product pricing compared to the year ago period with structural sales accounting for 42% and specialty sales accounting for 58% of total revenue during the quarter. The increase in total revenue is attributable to increased underlying structural product prices.

Overall, unit volume fell 1.9% compared to the same period a year ago, as specialty unit volume decreased slightly and structural unit volume decreased 3.3% during the quarter. BlueLinx generated approximately $61 million in gross profit for the quarter, up 3.9% from approximately $58 million in the year ago period.

Overall, gross margin was 12.2% for the quarter, consistent with last year's 12.3%, due to our continued focus on margin expansion. Third quarter operating expenses of $50.3 million were down compared to $57.1 million for the same period a year ago.

As previously announced, during the quarter the Company sold its distribution facility in Newark, California, and recorded a gain of $9.2 million, or $0.09 per diluted share, in operating expense. This compares to $2.1 million, or $0.02 per diluted share, in net gains from significant special items in 2011.

Excluding significant special items, operating expense increased approximately $300,000 compared to the same period a year ago, even though unit volume through the warehouse distribution channel increased over 6%.

We are pleased with our performance in effectively controlling costs in 2012 and our management team remains focused in this area. Tightly managing our expenses remains a top priority and we will continue to assess the proper cost structure of our business as revenue growth continues.

The Company reported operating income for the third quarter of $10.3 million compared to $1.2 million in the prior year period, reflecting a $2.3 million increase in gross profit and a $6.8 million decrease in operating expenses.

EBITDA profit of $12.4 million improved from $3.4 million profit in the third quarter of 2011 and reflects our ongoing commitment to margin expansion, cost management and operational efficiency, including our ability to refine our geographical locations when it makes business sense.

Our third quarter net profit of $3.1 million, or $0.05 per diluted share, compares with a net loss of $6.2 million, or $0.12 per diluted share, in the third quarter of 2011. Our reported net income for the period is after interest expense of $7.3 million compared to interest expense of $7 million in the prior year period.

The current year net profit is after tax benefit of approximately $100,000 compared to a tax provision of approximately $100,000 in the prior year period. Looking at year-to-date results on Slide 7, sales for the nine months ending September 29 totaled $1.47 million, up 7.6% from the same period last year.

Gross margin of 12.1% increased from 11.9% in the year ago period. Year-to-date reported operating expenses of approximately $168 million were flat compared to a year ago and included approximately $10.2 million and $8.8 million in significant special items in 2012 and 2011 respectively.

The resulting operating profit of $10 million compares to an operating loss of $5.7 million for the same period a year ago. The year-to-date reported net loss of $11.7 million, or $0.19 a share, compares with a net loss of $28.3 million, or $0.75, a year ago.

Turning to Slide 8, EBITDA increased $14.7 million over the prior year period due to an increase in gross profit and real estate gains partially offset by operating expense increases. Excluding the impact of significant of special items in 2012 and 2011, EBITDA improved by $13.3 million.

Turning to cash flow on Slide 9. During the quarter we generated approximately $23 million in cash from operating activities compared to approximately $17 million last year. Our third quarter 2012 operating cash flow was comprised of $3.1 million of net earnings, $3 million in noncash expenses, and $35.7 million decrease in working capital, offset by $9.3 million in other items and a $9.2 million gain on the sale of our Newark, California, distribution center.

The decrease in working capital primarily reflects seasonal decreases in accounts receivable of $10.4 million, $15.4 million in inventory and $9.9 million net increases in accounts payable and other working capital items.

Investing activities included $400,000 for capital expenditures and $16.6 million in proceeds from the sale of our Newark, California, facility during the quarter. Cash used by financing activities of $37 million included approximately $22 million used to reduce our revolving credit facility and approximately $15 million trapped as restricted cash related to the mortgage.

The resulting cash balance at September 29 was $7.9 million compared with a $5.9 million a year ago. For the nine months of 2012, we used approximately $87 million of cash for operating activities compared to approximately $84 million in cash during the year ago period.

Our operating cash flow in 2012 includes a net loss of $11.7 million, $9.4 million in noncash expenses, and $3.1 million in other items, offset by a $71.9 million increase in working capital, $9.7 million in gains from the sale of certain properties, and $5.9 million from the modification of a lease agreement.

Working capital increased primarily due to higher sales volumes at this time of year versus December. Cash provided by investing activities was $16.1 million for the nine months of 2012, driven by proceeds from the sale of certain properties.

Cash provided by financing activities was approximately $74 million, driven by a $90.7 million increase in outstanding borrowings through our revolving debt facility, $15.5 million increase in restricted cash related to the mortgage, and a $1.6 million usage from other items. This compares to approximately $72 million of cash provided by financing activities a year ago.

As a reminder, we completed a $60 million rights offering during the third quarter of 2011. On July 29, 2011, we issued approximately 28.6 million shares and received $60 million in gross proceeds from the rights offering. $56 million of the 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 total 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.

Moving to Slide 10, we had approximately $112 million of excess availability under our revolving credit facilities as of quarter end. That is approximately $69 million above our minimum availability requirements as of September 29. Consistent with prior years, excess availability likely will tighten through year end while our industry and our company continue to grow. But we believe that the amounts available from our revolving credit facilities and other sources will be sufficient to fund our operations and capital requirements for the next 12 months.

The combined debt balance on our mortgage and revolving credit agreements was $420.1 million, a decrease of $22.1 million from the second quarter of 2012. Net debt at the end of the third quarter was approximately $387 million compared to $427 million at June 30.

As previously discussed, during the third quarter of 2012 we sold our distribution center located in Newark, California. The cash received from the sale was reflected in the cash trapped at September 29, 2012. Subsequent to quarter end, on October 1, 2012, $12.8 million of cash from the sale and $11.8 million of cash accumulated in the cash trap was used to pay down the mortgage principal with no prepayment penalty.

Turning to Slide 11, cash cycle days for the third quarter totaled 59. This compares with 59 days sequentially and 58 days for the same period a year ago.

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

Okay, thanks, Doug. And now let's review the third quarter results in the context of our objectives and the current operating environment. Third quarter business environment improved as the underlying market fundamentals and our leading indicators continued to strengthen.

We operate in a business climate characterized by generally rising structural wood product prices and expectations of an improved housing market. Structural wood-based product prices rose during the first two months of the quarter but began to retreat later in the quarter.

Actual total US housing starts increased approximately 28% for the third quarter 2012 compared to the same period last year. Single family starts increased 29% and represents the housing end-use market to which BlueLinx is most closely tied to.

It appears the housing market is steadily recovering with consistent increases in housing starts and sales, coupled with good affordability conditions. For BlueLinx, the local markets in which we operate experienced improvements to varying degrees and we managed our business accordingly.

We are very pleased to report net income for BlueLinx for the quarter.

Total specialty product revenues fell slightly on lower product pricing and unit volumes. Gross margin of 13.2% was down 10 basis points from both a year ago and from the second quarter. While we're disappointed with the decline in revenue, this raises an important point regarding our specialty products business.

This grouping of products is diverse and it's made up of many end-use markets. Large portions of this product grouping, for example, paneling and roofing products, they're more closely tied to repair remodeling markets. And other products such as hardwood plywood and particle board are tied to our structural -- our industrial business. These businesses are recovering at a much slower pace than the new residential construction markets.

Other portions of this product grouping, they're more closely tied to new construction like siding and trim, engineered wood products and molding, among others. Consequently, we're experiencing varying degrees of growth within our specialty business.

As we evolve and continue to evolve into a specialty products distribution company, we're working to gain a deeper understanding of the end-use markets for our product assortment. We're identifying opportunities in growing end-use markets that are heavily skewed to specialty products.

For example, we have a team of highly motivated and knowledgeable people working jointly with our customers to expand our penetration with the multi-family housing segment. We believe this end-use market provides an attractive opportunity for BlueLinx and for our customers and we're aggressively and systematically pursuing these opportunities as a customer-focused, solutions-driven, value-added distributor.

Looking at our structural products, we did a good job managing this business in the third quarter. We effectively leveraged the upswing in wood-based structural product prices. We focused on profitability growth, not on unit volume growth. And as a result our gross margin improved 30 basis points from the same period a year ago. And that was up 40 basis points from the previous quarter.

I'm pleased with the margin performance in the quarter, with the successful execution of our margin expansion strategy. We remain focused on achieving gross margins above historical levels through our ongoing management of product pricing and sales discipline. We're confident with our margin run rates, given our ability to generate gross margins above historical levels throughout this housing market downturn.

We also continued to do a good job managing our expenses during the quarter. Even though we shipped more products through the warehouse distribution channel, these expenses were flat for the quarter compared to the same period last year as we continued to drive productivity improvements through our focus on delivery expense while continuing to maintain our focus on all costs and on our customer service.

As Doug mentioned in his remarks, during the quarter we successfully sold our distribution center located in Newark, California, which was always larger than our needs. We will close the sold facility and open a new distribution center in Northern California. We are always evaluating our geographic footprint and will make appropriate adjustments while maintaining our national distribution platform.

Looking forward, we have increased optimism that our business will show continued progress as good economic factors and leading indicators for our business point to improving market conditions and we continue to execute our strategy.

We've been seeing consistent improvement in housing, and the latest government reports indicate the housing recovery blossomed in September as the pace of home starts surged to a four year high. Reported numbers for both housing starts and permits to build homes were the best since 2008.

Low mortgage rates coupled with affordable housing prices and a slight drop in unemployment have helped to restart home sales. Foreclosures have fallen to a five-year low and the supply of new homes on the market is near record lows, according to government reports. All these factors have helped get builders back building again.

The repair and remodel markets are also projected to accelerate according to the Leading Indicator of Remodeling Activity, or LIRA. An improving housing market and record low interest rates are driving projections of strong gains in home improvement activity through the end of the year and into the first half of 2013, with annual home owner improvement spending expected to reach double-digit growth in the first half of 2013, according to LIRA.

Going forward, we believe BlueLinx is well positioned to capitalize on these opportunities as permits and starts turn to actual new home construction in the coming months and home improvement activity increases. Our entire organization, our people, our systems and our initiatives are all focused on aggressive pursuit of our goals.

With that, let me open the call to questions. Operator?

(Operator Instructions) We will pause for just a moment to compile the Q&A roster. Alan Weber of Robotti & Company.

So I guess a question on the specialty products, given most of your end markets were higher, can you just explain why volumes were lower?

Yes. When, we blend -- this is George, Alan. When we blend all of those products together into this thing we call specialty products, they were really drug down during the quarter by one really big code or product grouping and that was roofing. You probably read many of the roofing product public companies' numbers for the quarter were also very disappointing.

Our roofing business is a big business. And it had substantial declines in volume. That weighted the average down significantly. It was a -- the year was front-end loaded in roofing activity and it was compared against last year when we had a different type of storm than we just had this week. Last year we had a lot of winds and tornadoes and roofing -- and hail damage that drove unprecedented roofing shingle growth.

So that and a couple other codes that were -- such as paneling products, which I mentioned in my prepared comments -- saw declines during the quarter. And that's very much tied to our retail business. And our retail business was flat during the quarter.

So when you have codes with significant revenue that didn't grow or shrunk, that brought our weighted average on the other product codes that performed significantly above housing, like siding and trim and our engineered lumber products had a good quarter. Our molding products, which are tied to housing, had a good quarter.

And we call those strategic products. Those are the products we're focusing our inventory dollars, our sales time. We're trying to drive that growth as housing rebounds. We are optimistic that as the economy continues to improve that our businesses in things like particle board, in hardboard, that are more closely tied to what we classify as our industrial business.

We speak about that as furniture companies, store fixtures. We do a big business with the people who produce all the store fixture furniture for retail. That business has been slow but it's starting to see some signs of life. And we expect that to heat up as the economy heats up.

Okay. I just had two quick follow up questions. One was, in the -- there was a slide presentation different than what you went through this morning. I guess the presentation you made, you talked about some private label products that have been introduced the last year or two. Can you talk about those?

And the other question was, since you mentioned the storms that helped roofing last year, what is the result of the current storm on the East Coast? What does that mean for the Company?

Okay. Two questions. Well, let me get the storm one first. So the storm, it's too early for us to tell what that will mean. And unfortunately for all of our friends and family -- and I grew up up there and have a lot of friends and family and co-workers that are still trying to figure out what this storm means.

But there'll be repair. And repair will drive some demand. I don't know what that's going to translate to. But there will be increased demand and BlueLinx has a good market share in those geographies. So I'll expect an uptick in something. But it won't happen fast.

One of the things everybody's got to be careful for, those types of repair and remodels, they unwind. So it'll be over months and years. That's not going to happen -- everybody's not going to rebuild next quarter.

With regards to the private label and the other deck that we put on our website, we do have a growth plan that has -- one product code, for example, is SteelLinx, which is our metal product family. Those products are produced all over the world.

We like to take them to market in one package, in one marketing program. So if you go on our website you'll see that we have a SteelLinx family of products. That's fasteners, that's concrete accessories and other metal type products. We call that SteelLinx.

We also kicked off our program that we did talk about last year about this time with regard to our onCENTER. Which onCENTER is engineered lumber products that we bring to market. Doing a very nice job there and that's growing.

And we have a line called ProLine. And ProLine has some millwork products and some exterior trim products. That again, they're globally-sourced products that we have manufactured to our specs. We market, we develop a brand and we bring it and distribute it across the United States. And we're very happy with our growth that we see in that family of products, as well.

Okay, great. Thank you very much.

David [Daglio], The Boston.

Good morning, David. David, can you hear us? David? Okay, Operator, I think we lost him.

At this time, there are no further questions. I will turn the call back over to Mr. Judd for any closing comments.

Okay. Well, thank you. Thank you for listening in on the BlueLinx third quarter call. I look forward to talking to you next quarter. And for those of you in the Northeast that are able to listen to us, good luck and we look forward to helping you dig out from the storm. Thank you all.

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