Bluelinx Holdings Inc (BXC) 2013 Q3 法說會逐字稿

Good morning. My name is Toni 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.

(Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today October 30, 2013. Thank you.

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

Thank you, Toni. Good morning. Thank you for joining us for the BlueLinx third-quarter 2013 earnings conference call.

This call is being webcast on the Company's website at BlueLinxCo.com. The earnings release and presentation slides for this call can be found in the Investor Relations section of the Company's website.

This presentation includes statements about our expectations of future operational and financial performance that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are subject to a number of risks, uncertainties, and assumptions that could cause our actual results to differ materially from those provided including, but not limited to, risk and uncertainties with respect to economic, governmental, and technological factors outside of our control; and changes in the supply and/or demand for products we distribute, particularly as a result of conditions in the residential housing market. These and other factors that could cause actual results to differ materially from forward-looking statements are discussed in greater detail in our filings with the Securities and Exchange Commission.

Forward-looking statements speak only as of the date of this presentation. We undertake no obligation to revise them in light of new information. Finally, we undertake no obligation to review or confirm analyst expectations or estimates that might be derived from this presentation.

This presentation includes references to EBITDA, which is a non-GAAP financial measure, within the meaning of the Securities and Exchange Commission's Regulation G. Reconciliations of net income to EBITDA and segment income to segment EBITDA are included as an appendix and are posted on our website at BlueLinxCo.com.

Our speakers this morning are Howard Cohen, Executive Chairman, and Doug Goforth, Chief Financial Officer. Doug will begin the call this morning with a review of the financial statements. Then Howard will comment on the current results and add a final perspective before opening the call to your questions.

Now let me turn the call over to our Chief Financial Officer, Doug Goforth.

Thanks, Maryon. Good morning, everyone, and thank you for joining us today. This morning we reported a net loss of $3.2 million, or $0.04 per diluted share, for the fiscal third quarter of 2013 compared with a net profit of $3.1 million, or $0.05 per diluted share, for the fiscal third quarter of 2012.

As noted in our press release this morning, our third-quarter results were impacted by the following previously announced items. A pretax restructuring charge of $2.8 million, or $0.03 per diluted share, primarily related to the closure of five distribution centers and a pretax gain of $3.7 million, or $0.04 per diluted share, related to the sale of the Company's office building located in Denver, Colorado.

Beginning on slide five overall sales for the third quarter ended September 28 totaled $558 million, up 12.3%, or $61.1 million, from the third quarter of 2012. Specialty sales increased 11% year over year, reflecting a 10.2% increase in unit volume and a slight increase in product selling prices.

Specialty products comprised 57% of total sales, up from 55% in the second quarter of 2013, as we continue to focus on higher margin products and services, and down from 58% from the same period last year. Structural product sales increased 15% from the same period last year.

This increase was driven by a 14.2% increase in volume and a 0.9 year-over-year increase in product selling prices as prices for wood-based structural products stabilized during the quarter. Overall, unit volume increased 11.9% compared to the year-ago period.

Gross profit for the third quarter totaled $62.5 million, up 3.2% from $60.5 million in the year-ago period. Gross margins were 11.2% compared to 12.2% a year ago. Overall, gross margins were impacted by a higher mix of lower margin structural sales, lower margin sales related to the closure of five distribution centers, and a highly competitive pricing environment.

Third-quarter operating expenses of $59.4 million increased $9.1 million compared to the same period a year ago. Operating expenses included $0.9 million in net gains from significant special items previously discussed compared to a $9.2 million gain from the sale of certain properties in the prior-year period.

Excluding the impact of the significant special items, operating expense as a percentage of sales improved to 10.8% compared to 12% a year ago, even as unit volume through the warehouse channels increased 11.6% compared to the year-ago period.

Reported operative profit for the quarter was $3.1 million compared to an operating profit of $10.3 million a year ago and reflects the increase in gross margin and the significant special items previously discussed. The third-quarter net loss of $3.2 million, or $0.04 per diluted share, compares with a net profit of $3.1 million, or $0.05 per diluted share, in the third quarter of 2012.

Our reported net loss for the period is after interest expense of $6.9 million compared to $7.3 million in the prior-year period. The current quarter net loss is after a tax benefit of approximately $600,000 and compares to a tax benefit of approximately $100,000 in the prior-year period.

After adjusting for previously discussed significant special items in the third quarters of 2013 and 2012, adjusted net loss for the quarter ending September 28, 2013, was approximately $2.2 million, or $0.03 per adjusted diluted share, compared to an adjusted net loss of $3.7 million, or $0.06 per adjusted diluted share, in the year-ago period.

The Company's operating results for the 2013 and 2012 third-quarter and year-to-date periods adjusted for significant special items are shown on slide six in the presentation accompanying this conference call and in the Company's press release issued this morning. A complete reconciliation of GAAP net loss to adjusted net loss is included in both the appendix of the conference call presentation and the press release supporting tables.

Turning to cash flow on slide seven. During the quarter BlueLinx generated approximately $63 million in cash from operating activities, up from approximately $23 million for the same period last year.

Moving to slide eight, we had approximately $93 million of excess availability under our revolving credit facilities as of quarter end. That is approximately $51 million above our minimum availability requirements on our US revolving credit facility as of September 28.

The combined debt balance on our mortgage and revolving credit agreements was $437.9 million, a decrease of $63.9 million from the second quarter of 2013. Net debt at the end of the third quarter was approximately $422 million compared to approximately $387 million at September 29, 2012, and $491 million at June 29, 2013.

Consistent with prior years, excess availability always tightens through year-end, 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.

As previously discussed, during the third quarter of 2013 the Company sold its office building in Denver, Colorado. The cash received from this sale was reflected in the mortgage cash trap at September 28, 2013. On October 1, 2013, $8.4 million of cash was used to pay down the mortgage principal.

Turning to slide nine, cash cycle days for the third quarter totaled 61. That compares to 63 days sequentially and 59 days in the same period a year ago. The sequential decrease in cash cycle days is probably a result of efforts to rationalize our inventory to ensure an appropriate return on investment.

We continue to balance inventory levels with the demand environment, while also continuing to support strategic products 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 Howard.

Thank you, Doug. I will begin my remarks with a brief report on the progress made on the path to profitability roadmap outlined during the Company's second-quarter conference call. Slide 11 provides a complete overview of the roadmap, along with an update on each component of the Company's plan to create sustainable and profitable growth for BlueLinx.

I will highlight several key items impacting the third-quarter results. The implementation of the restructuring program is proceeding as planned and sales and operational initiatives are having a positive impact on the Company's financial performance. Despite the restructuring this quarter, the Company achieved significant improvement in same-center results; specifically we have regained sales growth momentum in higher-margin specialty products.

The renewed focus on specialty product growth resulted in an increase in revenue of approximately $32 million, or 11%, over the same period last year as unit volume increased 10.2%. This unit volume increase is the strongest specialty unit volume growth since the first quarter of 2012, which was favorably impacted by mild weather. We are encouraged by the unit growth we are able to achieve in the quarter.

Same-center specialty product growth grew 11.7% from a year ago. The mix of specialty products also improved for the third quarter, rising to 57% of total revenues from 55% in the second quarter of 2013.

On an overall basis, commodity pricing has stabilized and margins are recovering. Overall gross margin increased approximately $2 million over the same period last year. As Doug discussed, gross margin percentage was pressured during the quarter by several factors including the wind down of the five distribution centers that were closed in September. However, on a same-center basis our margin percentage improved throughout the quarter and continues to improve in October.

Third-quarter results benefited from operating leverage as a result of changes made to reduce the Company's cost structure and simplify the organization structure. As previously announced during the quarter, we closed five underperforming distribution centers.

Turning to slide 12, on a same-center basis sales increased 14.2% for the third quarter compared to the same period a year ago. Adjusted EBITDA increased 118% to $6.1 million from $2.8 million for the same period a year ago. The increase in adjusted EBITDA reflects an increase in unit volume of 11.9% and the Company's continued focus in operating efficiencies and leveraging fixed costs as unit volume increased.

We have launched other initiatives this quarter that we believe will add significantly to the Company's financial performance. We are pursuing multiple avenues for growth in addition to accelerated specialty product growth, including an emphasis on faster growing markets and expanding into adjacent markets like multi-family.

Finally, I would like to take a minute to discuss our search for the permanent CEO. During the last five months the search committee has met with an exceptional group of candidates that we believe are capable of rapidly taking the Company to the next level. While we are not ready to make an announcement, I expect the new CEO to be in place the first of January.

Since this may be a last chance for me to publicly address this audience, I want to thank everyone at BlueLinx for the support they have provided me over the past several months. While there remains much to accomplish, I feel fortunate that we have such a dedicated team eager to support the permanent CEO.

With that I will open it up for questions. Operator?

(Operator Instructions) David Williams, Williams Financial.

Thanks for taking my questions. It looks like you guys are making some good progress on really moving up that mix of specialty products in the overall revenue base. From 57% to 59% was a nice move; can you talk a little bit about the strategy in driving that specialty?

And then maybe what that margin differential is and where you would expect that to go maybe over the next nine to 12 months?

This is Howard. We, obviously, lost some focus in the second quarter as it relates to commodities. I think, more than anything else, it was management direction to bring both our inside and our outside salesforce much more in line and focused with what really our long-term as well as short-term objectives are, which is to move specialty products which have higher margins and can differentiate us from our competition.

As it relates to the margins, there was still some margin compression in the last quarter as we did some SKU rationalization to take out some of the product lines that really weren't moving and to get our inventory better under control. So even though our margins did improve in the last quarter, you will see improved margin performance going forward as we have washed through some of that inventory that I just talked about.

Basically, we are looking to see margin significantly in the, call it, 15%, 16% level coming out of warehouse and blended margins in specialty products to be around 14% or so. We are going to move in that direction and we think we certainly can do that in the near future.

Great. And if you could just kind of characterize how you feel today on the progress that you have made. You obviously made some changes here; it looks like it is impacting the bottom line, but how are you feeling about it?

Are things moving maybe in the direction you expected? Are we maybe ahead of where you thought maybe the schedule would be? If you could give us a little color around that restructuring.

No, I don't think we are ahead. I think we are right where we would like to be. I have been very careful not to, what I would call, box the new CEO into a corner as it relates to strategic planning long term as he looks at the company and tries to bring in maybe a new vision for us.

So I think I've done much more of what I would call blocking and tackling. The restructuring is getting -- spans the control appropriately placed within the Company, providing more direction to the markets that we serve where we have a strategic advantage or we have critical mass, where we are upgrading the management teams in some of the more important locations so that we can implement better our strategies.

We have taken out basically a layer in many areas of management, but we have actually reinvested some of those dollars in more people on the street, either inside or outside. So I am pleased with where we are restructuring-wise.

I think that there will be some additional changes when the new CEO comes as he has some fresh eyes and looks at the business, but certainly we are back on a path that will allow the Company to have positive EBITDA, both short and long term. And I am pleased with the response that the Company has had to the changes that we have made.

I hope that answers your question, David, but please, if there is additional ones, please ask them.

Perfect. It certainly does and thanks again for that color there. I guess next, if you don't mind, I wanted to see what your thoughts were as far as the demand that you are seeing today.

You guys are early in the supply chain, but thinking about what some of the distributors, some of your customers have said lately, thinking about where the homebuilders are as far as new order growth seems to be slowing a bit, what is your real outlook and are you seeing anything? Are you maybe seeing less orders coming from your customers today from where we were earlier on outside of normal seasonality? Are you seeing anything today that gives you any concern about maybe where the market is today?

I think -- first of all, I certainly wouldn't consider myself an expert in this industry, but I will say this; I think many people need to really understand the markets that this company serves and what really the profile is of who we serve. About 50% of our business is to single-family -- in the single-family area through basically distribution to step.

But a good percentage of our business is also through home and remodeling and that area grows at a much lesser rate, more in the 7% to 8% to 9% range. When you look at our performance in the last quarter and you see what our specialty growth was I think it speaks very well that we are holding our own and actually potentially growing in market share in that particular area. When you look at the mix of both single-family and the markets that we serve because, again, we are not in Phoenix, we are not in some of the other areas where a lot of the growth is still maintaining itself and it basically goes direct through one step.

We have not seen a slowdown in performance I think in specialty sales, especially the specialty sales. I think what you have seen is that we are capturing our fair share and maybe a little bit more. I don't think the market is growing as fast as some of the prognosticators mentioned at the beginning of the year, but I think the market is growing somewhere between 15% and 20% this year.

We have got some tailwinds for us going into the next couple of years. I am optimistic but I am not -- I don't think we are seeing the 25% or 30% forecasts that sometimes people put in the newspapers.

Sure, I understand. Well, thanks so much. I appreciate your time and good luck on the next quarter.

Thank you. Hopefully, there will be someone else -- I know someone else will be talking next time.

[Mark Kaufman], [Whitelow Assets].

I just wondered if you could comment on the status of the closed distribution centers. I know you are contemplating selling them.

This is Doug. The facilities they are all, as per operations, are closed. Three of them are leased facilities so we are completely out of there, and we are in the process of working on some sublet deals for those.

The two properties that we own, one of those is under contract and we expect that to close probably in November. And the other property is actively being marketed and there is a lot of interest in that. While it might not close this year, we certainly expect it to close probably the first half of next year.

A follow-on question if I could operationally. The decentralization of the, well, operations basically; how is that proceeding?

Again, let's be careful with the word decentralization. It is not that we moved people to the field from headquarters. What we did was we are taking a look at a better buying and better understanding of the local markets, and allowing the management that manages those local markets to have more influence in the products and the types of inventory that we carry so that we can satisfy the customer.

We are spending much more time trying to understand what does the customer want and then trying to provide the products and services necessary at the local market, even if that differentiates itself from a national perspective. We are at the beginning stages of that so I don't think you are seeing any of those results in any of our performance numbers.

But as we move into the next couple of years and we better focus on penetration and going deeper into the accounts that we serve, as well as trying to move into new accounts and are more consistent with what they are requiring us to provide them, I think you will see greater margins and an improved revenue performance growth than we have seen in the past.

Thanks very much.

Alan Weber, Robotti & Co.

Howard, I believe you made a comment about in Phoenix -- either I think you said you are not in Phoenix or (multiple speakers)?

No, we are not. We closed that facility. It was just an example of there are some markets, especially a market like Phoenix, where the majority of product goes one step versus two step. So even though there is high growth in a market like that, a company like ours, even when we were in that market, we were not seeing the kind of growth that we would look for, nor do probably most of our competitors unless they are shipping direct. So I was just using that as an example.

As we now look at the footprint of BlueLinx, it is not looking at the total market and saying that is what the growth is. We're trying to segment it to the MSAs, so we really could take a look at what really our growth should be considering both what goes through one step, what goes through the large homebuilders, as well as what markets we can serve best with our distribution assortment.

And I guess a follow-up on that. Can you explain why certain markets don't use two-step distribution?

I wish they all did. You take where there is mass, large mass homebuilders they have the power to go direct. They have enough inventory demand that they can skip the traditional channels. They still use us for fillers, but when they use us for fillers it is obviously that they are using a local distributor for that filler that we supply in the two-step arrangement.

So we are certainly going to do better in areas where there are smaller builders, where they are certainly more reliant on local distributors than they are on going direct for their products.

Okay. In your comments I think you talked about a highly competitive pricing environment. I'm just curious; if there is increased pricing pressure coming from -- is it the two-step distributors that you are competing with or are you seeing more going once or bypassing the two-step distributor?

I don't think I made a comment about pricing.

Howard, that was actually mentioned in the press release and the script.

Alan, there is pressure certainly from home center customers that we have and then there is competition, particularly between two-steppers on different product. There is some specialty product; there has also been a lot of competition on like installation and those are the things that are keeping the margins compressed.

Okay, great. Thank you very much.

David Williams, Williams Financial.

Appreciate you taking additional questions from me. I wanted to see if you could kind of touch on what you are seeing within the retail channel knowing what your mix is there. Are you seeing as strong a demand maybe coming out of the home centers?

And you talked about maybe 7%, 8%, 9% growth, but it seems like we are definitely on an uptick for the repair/remodel part of the industry. Are you seeing that flow through and what are your expectations maybe as we get into next year?

Without getting specific on home centers I would say we include home centers in repair and remodeling, but we have a lot of other customers that we classify in that as well. We have definitely seen an uptick in demand in that really starting kind of in the late second quarter and early in the third quarter. There has definitely been an uptick.

It is not the high numbers that Harbor puts out and it is study saying it is 19%, 20%. It is nothing like that, but we have definitely seen growth in that regard.

And it has continued to be relatively strong in October. There is going to be the normal seasonable slowdown, but October, particularly in repair and remodeling, has continued to be fairly robust.

Great, thanks. Then one last one if I could hear. Can you kind of comment about maybe how lumber prices impact your business? And now that we have seen some stabilization in the lumber prices what does that mean for you guys? Are you looking for prices to move up as we go into next year, or what maybe if you could kind of frame that?

Higher prices are always good for us, particularly when they first start rising if we were positioned correctly with our inventory. In the third quarter there was actually a rise in lumber prices and lumber is our largest product code that we sell, so we move a lot of footage.

So there was a price uptick there. Your other structural wood products primarily were down on a year-over-year basis. In fact, OSB was down significantly. But lumber prices, they are at fairly high levels right now so we are not necessarily anticipating any material increase in 2014.

In fact, you could definitely see some compression. And I know Howard has spent a lot of time on structural products with our structural guys, so he probably wants to interject on that.

Especially as we get into the second quarter of next year you are going to see a fairly dramatic decrease in pricing. Footage may improve but because the pricing was so high it will be very (multiple speakers).

Probably more the first quarter than the second quarter. The first quarter you were at -- particularly all structural products you were at close to eight-year highs in most of the third quarter and then prices, as you recall from our earnings release for the second quarter, that is when they plummeted throughout the quarter. So there will still be a little bit of hangover in the second quarter, but you will really see it in the first quarter.

But I was really talking more about the margins. As we tried to push through the products that we bought obviously our margins took a significant hit in the second quarter, but the pricing was in the first quarter.

And there is a certain amount of elasticity, at least with the margin percentage, that you are going to get, David, because rising prices are good. If you are earning 10%, you are only going to be able to continue to earn 10% up to a certain level of pricing and then that markup is just not sustainable in the market.

The competition is not doing that so you will see some pressure on that. And we have experienced some of that over some of our previous quarters here. Particularly when prices were rising in the fourth quarter of last year and the first quarter of this year you saw some margin compression. Although we were getting more margin dollars, that percentage decreased.

Great, thanks again, guys. I certainly appreciate it.

There seem to be no further questions at this time. I would now like to turn the conference back over to Mr. Cohen for closing remarks.

I would like to thank everyone for their participation today and look forward to -- not me, but we look forward to talking to you in the future. Thank you.

Thank you for your participation in today's conference call. You may now disconnect.