Bluelinx Holdings Inc (BXC) 2014 Q3 法說會逐字稿

Good afternoon. My name is Angel and I will be your conference operator today. At this time I would like to welcome everyone to the BlueLinx third-quarter 2014 earnings conference call. (Operator Instructions) Ms. Lowden, you may begin.

Thank you, Angel. Good afternoon, everyone. Thank you for joining us for the BlueLinx third-quarter 2014 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 include statements about our expectations for future operational and financial performance, as well as our credit agreements, liquidity position, and capital structure 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 risks 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 analysts' expectations or estimates that might be derived from this presentation.

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

Our speakers this afternoon are Mitch Lewis, Chief Executive Officer; and Susan O'Farrell, Chief Financial Officer. Mitch will begin the call this afternoon with comments on the current results and a review of the business. Then Susan will review the financial statements before opening the call to your questions.

With that, I will turn the call over to Mitch.

Thanks, Caroline. Good afternoon. I'd like to talk briefly about the highlights of our third quarter and what we are focused on, and then I'll turn it over to Susan who will walk you through our financials in more detail.

Our third quarter was another solid quarter where we enjoyed improving results compared to our prior-year performance. Our adjusted EBITDA of $11.1 million is a $3.9 million or 54% improvement from Q3 in 2013. It's the first time we've had back-to-back quarters over $10 million since prior to the economic meltdown that began at the end of 2008. We are pleased that the initiatives and efforts of our team are providing momentum in our performance. And we are just getting started.

Our revenue for the quarter for the first time this year exceeded our 2013 performance on a same-center basis as the markets continued their modest improvement. Same-center sales for the quarter were up 3%, but to be fair, this increase was below the single-family housing starts increase of 7.1% for the quarter. As has been the case really all year long, our specialty products have outperformed and structural products on a comparative basis.

We've discussed previously the long inventory position we took in structural products in the first half of 2013, and we sold off the remainder of this position in the third quarter of 2013 which again impacted our volume structural products and led to the decline in our comparative structural sales in the third quarter of this year, which were down by 1.7%.

Our specialty sales continue to perform better and increased from the third quarter of 2013 by about 6%, which is pretty much on pace with the increase of single-family starts for the quarter.

While we did experience another decline in our structural product category, I think it's important to emphasize that our goal is not to focus on the sales of our specialty products to the detriment of our structural products. A primary value we bring to our customers is being a full-scale building products distributor with thousands of building products to sell and this requires having all product categories our customers need which of course includes structural products.

Also as we continue our focus on contribution margin rather than just gross margin, we now more fully understand that the costs to serve our customers is often lower within our structural product category. The bottom line is that we are working hard to profitably serve our customers with the products they want. And that certainly includes our structural product category.

You should be aware that we recently initiated a strategic directional shift to increased local autonomy at BlueLinx. It's clear that our markets across the United States vary greatly when you look at virtually any component of our business -- whether it's our products, supply base, customers, brand preferences, fragmentation, or even the competitive landscape in which we operate. So, we've made the decision to give our local general managers more control over local decisions.

We spent two full weeks over the last two months having detailed strategy sessions with each of our local general managers at BlueLinx. And what is apparent after these discussions is that there is tremendous opportunity at BlueLinx to grow our business. We plan to do this by expanding our sales to customers who we don't currently serve while also growing the share of the existing products we offer to our current customer base. We want utilize the vast array of products currently carry, which today exceeds 10,000 products, to capture share in our markets.

We are also investigating adding or enhancing very light manufacturing capabilities to the organization. These investments would have relatively small capital requirements, and we believe would enable us to add value to our customers and suppliers while increasing our returns on the products we sell. We look forward to sharing with you some of the successes in these areas in the months ahead.

We are also now making good progress on several of our operational initiatives. We have initiated our sales and inventory operational process and are working to ensure we have the appropriate inventory levels required to effectively service our customers. To be clear, I would not expect a significant reduction in our inventory levels in the first few quarters of this process. We are actually more focused on converting our investment in underutilized inventory into SKUs where we believe we have the opportunity to grow our volume. We believe we have missed some good opportunities grow our business simply by not having plenty of inventory in our existing products when demand spiked in certain product categories. So for now, we will be focused on both reducing excess inventory while making sure that the products our customers need.

We've also made progress in our efforts to improve our logistics and operational performance. Just one example of this is the work we've done to improve efficiency in the truck routes we have use to deliver products to our customers. In the third quarter, the sales that were shipped out of our warehouses from our existing locations increased by approximately 3.2%. At the same time we were able to ship these additional products to our customers while driving approximately 130,000 fewer miles and were able to save about $200,000 in fuel costs during the quarter. This efficiency improvement also enabled us to decrease our seasonal outsourcing to third-party carriers during the quarter by around $150,000. So, we are making good progress and yet significant operational efficiency opportunities remain.

As you are likely aware, now is the time of the year when our industry becomes intently focused on next year's housing starts. I've personally talked to numerous suppliers, customers, and even several economists about 2015 expectations. I can tell you at this point that economists covering residential housing tend to be much more optimistic than our suppliers and customers. The economists I've heard tend to continue to look at how low current housing starts are relative to historical levels, which of course on its face is certainly a cause for optimism. Our customers and suppliers have not been as aggressively optimistic, and generally, we are hearing 2015 estimate growth in the 5% to 10% range.

But we are not relying on the forecast to drive our activity at BlueLinx. Rather we are planning to make sure that we are able to ramp up if the markets take off next year or scale down in the event the industry hits a speed bump.

As we enter into the fourth quarter of 2014, we are now looking back at a year where it appears we have turned the corner at BlueLinx. Our year-to-date adjusted EBITDA is $22.7 million. And this is after five straight years since the economic downturn of 2008 where we had little or no annual EBITDA.

We are also entering now the fourth quarter which typically slows down and, as I am sure you aware, is the period in which the performance in residential construction and building products is notoriously reliant on weather conditions. And we have seen a slight softening in our markets over the last couple of weeks.

Rest assured we are discussing contingency plans in the event of another harsh winter to help mitigate the impact of the significant volume decline, but based on what we're seeing today our expectations are that 2014 will be the best performance we've had here in many years.

And the really good news is that we are just getting started. Now, I'd like to personally thank our BlueLinx associates for their collective efforts to quickly capitalize on the opportunities we have drive to improvement at our Company. This organization's scale, footprint, and customer and market intimacy bode well for a long and prosperous run in the years ahead as the housing market recovers.

And now, I'd like to turn it over to Susan who will discuss our numbers with you in more detail.

Thank you, Mitch, and good afternoon, everyone. It is a pleasure to speak to you about our business and our third-quarter results. For those of you following along, I'll begin with slide 10.

Revenues for the third quarter ended October 24, 2014, decreased by 1% to $549.8 million from $557.9 million in the third quarter ended September 28, 2013. On a same-center basis, 2014 third-quarter revenues increased $14.3 million, or 3% compared to the fiscal third quarter of 2013. The factors driving this increase were unit volume growth in our specialty business, as well as higher pricing from plywood and lumber categories.

Gross profit for the third quarter totaled $64.6 million, an increase of $2.1 million or 3% from $62.5 million in the year-ago period. Gross profit on the same-center basis for 2014 fiscal third quarter increased by approximately $3 million or 5% compared to the fiscal third quarter of 2013.

Gross margin increased approximately 50 basis points in the third quarter of 2014, up 11.7% from 11.2% in the fiscal third quarter of 2013. Our third-quarter gross margin showed improvement in the year-ago period due to lower margins realized last year as we sold through inventory for the five locations we closed. Additionally, our margin improvement in the fiscal third quarter of 2014 can be attributed to our higher pricing in our specialty business where we saw improvement in 15 of our 21 product categories.

As Mitch shared with you, we continue to work on improving not only our gross margin but our overall bottom line. We have implemented a contribution margin tool that enables our general managers to have better line of sight to not only gross margin but also our cost to serve. Our teams are working to better understand the contribution of our products in the markets we serve. We believe this will enhance our ability to improve our business.

Our operating expenses were $58.5 million compared to $59.4 million for the same period a year ago. As of the end of the third quarter 2014, we had fully realized the cost savings due to the restructuring last year and have actually exceeded our $13 million savings target by approximately $2 million. We achieved these additional savings through additional expense control and G&A payroll, travel, and supplies.

Continuing on slide 11, the Company had a loss net loss of $0.9 million or $0.01 per diluted share in the fiscal third quarter of 2014, which is improved from a net loss of $3.2 million for $0.04 per diluted share for the year-ago period. Unfortunately, we had some special items recorded this quarter, primarily a $2.4 million reserve for restructuring, severance, debt fees, and other, without which our net income would have actually been $1.5 million.

Finally, adjusted EBITDA for 2014 fiscal third-quarter improved to $11.1 million from an adjusted EBITDA of $7.2 million for the same period a year ago, up $3.9 million for 54%.

Turning to cash flow on slide 12, our cash usage for the year to date improved by $17.4 million compared to year-to-date usage as of the third quarter of 2013 of $70.8 million. This decrease in cash used by operating activity primarily reflects our improved earnings over the year.

As we turn to slide 13, our working capital reflects a seasonality in our business. Our net working capital as of the end of the quarter decreased by 2.5% compared to the prior period due to the seasonal increase of our current maturities of long-term debt. We anticipate current maturities of long-term debt to ebb and flow on a seasonal basis. Other components of working capital increased due to demand, seasonal payment patterns, and increased purchasing volumes related to that increased demand.

Moving to slide 14, we had approximately $88 million of excess availability under our asset-backed credit facilities as of the quarter-end. That's approximately $43 million above our minimum availability requirement on our US revolving credit facility as of October 4, 2014. Moving into the winter and due to the seasonal nature of our business we expect lower inventory levels throughout the winter, which will in turn lower our availability under our ABL as is the normal course of business.

As of October 4, 2014 the combined debt balance on our mortgage and revolving credit agreement was $455.8 million. Of that total, our mortgage balance is approximately $178 million not including our prepaid principle of $4 million held by our lenders as of October 4, 2014.

As we announced in August of this year we amended our US revolving credit facility in the third quarter extending the $20 million Tranche A loan final maturity date to June 30, 2015. As we finish the year, we continue to examine favorable debt financing refinancing structures and strategies for the future.

That concludes my remarks. So with that, Angel, we'd like to open up the lines to any questions we might have.

(Operator Instructions)

Tristan Thomas, Sidoti.

A couple questions. First, Mitch, you mentioned -- forgive me if I am not quoting you 100% right -- that structural products are actually a lower cost for you to get to your end consumer than specialty. Could you maybe provide just a little bit more color on that?

Yes. So one of the things -- and Susan alluded to this -- that we are really becoming zealots about is the contribution margin of our product offering. So as you look at lower gross margin products to the extent, for example, you are selling carloads of those products that, for example, has a lower cost than when you are selling a much smaller proportion of a truck. So you may have lower handling costs, you fill up the truck so you have a lower per unit freight costs associated with the product category as well. So, we talk a lot about the gross margin of the business, and the one thing I wanted to just highlight was that sometimes while the gross margins look lower, it doesn't necessarily tell the whole story.

Okay. So is that simply just kind of an aspect of just as volume increases for structural, it obviously becomes more efficient? Correct? Am I looking at it the right way?

Yes. I would say generally the structural which are much more commodity-based -- there's a higher percentage that might be direct. Ship sales, for example, that has very low cost for the company, or higher reload percentages which may have a lower cost as well. But for sure for all of our products, as volume increases the per unit logistics and operational costs should decline.

Okay. Got you. So what specifically are you going to do to try to drive structural volume?

Well, one of the things is emphasizing it. We have gone through a very rigorous process just recently in our incentive programs. We haven't fully announced this yet to the team, but we are looking at changes that we made last year that we think were actually counterproductive and might have negatively impacted the sales of some of the products. The focus, again, on looking at the overall contribution margin and the return on the invested capital associated with the sales will also I think drive us to better decisions and enable us to understand that we actually can sell at a lower gross margin that actually may have a higher return on invested capital for the Company.

Okay. So what would be kind of your ideal product mix between structural and specialty compared to where it is now?

Yes. And that's a great question. We really are not setting targets. I know historically we've talked a lot about really trying to drive the organization to a specialty mix, and that's one thing that I think is important to understand that we -- the legacy of this Company certainly has been much more in the structural basis. It's enabling for us. I talked about trying to get more share of the wallet from our existing customer base. A part of that is giving them a product that may be a lower margin might enable us to get products that have higher margins. So, really, we are trying to push down decision-making into the organization, enabling them to make good local decisions and they need to look at the products and the customers on an independent and local basis. And we don't really have a target for the mix at all.

Okay. Just because you touched on some of the local decision-making, how long has that been implemented?

We really rolled it out -- we had a strategic Board meeting in August where we talked about it at length with the Board of Directors, and basically walked away from that with the decision to go to the organization to communicate that. So, I would say the end of August we started the communication and then we had these -- they were basically three-hour sessions with roughly 30 independent general managers and the senior executive teams over a three-week period or so. That took place mostly in mid-September through mid-October. And part of that was with the planning process we were really pushing a local approach to our planning session and to have really a step back, think like an entrepreneur, think like a local manager; to drive value that you can provide to your customer base at the local level.

Okay. So is it still a little too early to maybe quantify any kind of positive impact from that?

Yes. It's very early. I will tell you the organization got very excited when you take notes from each of these meetings and you just talk through all the opportunities that we had when we started thinking locally and entrepreneurially. There is a long laundry list of opportunities that we're driving through now, as we speak.

Moving on -- just towards pricing for the fourth quarter, maybe a little bit more in depth about 2015, I mean do you think we are going to kind of stay at these levels, or do you think we still have a little bit more room to run, regarding lumber and plywood?

That's a great question. I'm smiling, I have to tell you, because I tell everybody an organization that the thing about commodities is it's really challenging to know exactly what's going to happen. And if you know what's going to happen 90 days out, you probably should do that for a living. So I would tell you generally what we are hearing is that it feels like there's some stability. We might be at the height of the market, but I would also tell you I really am not qualified to tell you exactly where it's going over the next --

I was just kind of curious if kind of heard anything, maybe some of your suppliers.

Generally the sentiment is that it's stable to marginally declining over the next 90 days. But we'll see.

And just one final question, September housing data -- a lot of mixed kind of signals. What are you kind of looking for, outside of the weather for the fourth quarter? Do you think it's going to be kind of that slow steady pace you've had the rest of this year, or do you think it may decline a little bit moving into 2015?

Yes. As you know we generally don't talk about the business going forward. I will say the sentiment is relatively flat. So if you are thinking that kind of 140,000 range, that feels kind of what we are hearing from our customers and the suppliers as well.

Okay. Fantastic. Thank you, guys.

Alan Weber, Robotti & Co.

Good afternoon. When you talked about kind of the decentralized decision-making, can you talk about, I guess, how far through that process you are? And also, do they have -- do the general managers -- have they always had the proper data to kind of interpret what the P&L should be on incremental margins or which products are more profitable and like that, or is that just more recent?

No. I would say the data was always here. There has been a historical trend in the organization to make a lot of decisions as it relates to product or movement of product, categories, markets centrally. The data I think was generally here. The contribution margin that both Susan and I alluded to is something that we really drove. The FP&A and accounting teams have done a terrific job in a very short period of time to come up with basically an internal tool that is fantastic as far as assessing a product and a customer and how much the incremental sale or the loss of the sale would mean to the ultimate operating profit of the Company. So the data has been available.

What we are really trying to do is because of -- and really it's the nature of the market in my view -- the economy obviously as you know in this market has been terrible. It led to layoffs, tighter controls that I think you have to have in a command-and-control type of environment and when your markets are suffering the way that the housing markets has suffered. But the problem is I think it's negatively impacted the entrepreneurial spirit of the organization.

So that's a cultural shift that we really just started in the last 90 days or so. And with any the cultural change in a large institution it takes time. Some folks pick it up immediately and say why did it take you so long, and some folks need a little nudging to take risks or make independent decisions.

Okay. And then you talked about some additional manufacturing that wouldn't require much capital. What were you specifically talking about?

There are a few things I'm specifically thinking about and these came out -- several of these came out in the context of our strategic sessions that we had with the general managers. One I could talk to is that you would think of just what I would call light fabrication, maybe cutting lumber or cutting metals -- very light manufacturing. That does provide value add to our customer base. So this is not major capital equipment or major fundamental shift in what we're doing, but very light fabrication.

Okay. Then my last question is, over the last year or so you closed a few sectors. Can you talk about other changes that you see on the distribution side in terms of competitors for vendors like that that might impact you, besides just housing starts?

Yes. I'll tell you one the things that came out of our discussions is the market opportunity and the market share that we have, which in the marketplace is highly fragmented. As we were looking at the strategy for the business, we also did some deep dives into the competitive landscape. One of the things that really caught me off guard, candidly, that I did not expect when I came on board was how fragmented the wholesale distribution market is for building products. If we looked at, for example, I think it was the Atlantic region -- don't hold me to these numbers -- but it was something like 70-plus competitors in that marketplace.

And so, there's some consolidation that has taken place. There's some regionals that are opening up. There are specialty wholesale distributors that are opening up. But I look at it, and I think the organization is looking at it now, is -- look, we have tremendous scale both in products and our footprint. Certainly, I think we have the most knowledgeable associates in the industry and really the approach we're taking is that literally our industry is a blue ocean for us. And so, the fact that there are trends that are changing or may be changing from a wholesale distribution standpoints is not something that fundamentally concerns us or something that we are really focused on. Right now, we are focused on servicing our customers better and gaining share. And there is a lot out there that we can get.

Okay. Thank you very much.

Mark Kaufman, MLK Investment Management Group.

My question is when do you hope to start to see results from this move to the regional or local market focus? And also, I've heard this issue about BlueLinx about a year before you arrived, that it had become too centrally operated in light of the recession and the collapse of the housing industry. So I'm just curious what kind of benchmarks that you have or timeframe that you have, hope to see some of the improvements. Also if you could just comment about what you're seeing in home improvement channel for your products?

Okay. Great question on the timing. The answer to that is, immediate. I mean I have already seen it. Whether it's very quick reaction time to opportunities from new supply channels or suppliers coming in where we've made -- where product managers have collaborated very closely for example with local management to make decisions about bringing new brands and products into the organization, which in the past would have been a centralized decision, in all likelihood, pushed down to the organization and, in all likelihood, we have a lot of inventory in places that we wouldn't need them.

So the problem is category categorizing that -- when you are talking about a cultural shift from centralized to decentralized. We are not doing it intending to add headcount into the organization, but the actual amount of dollars that it immediately going to drive or long-term is going to drive would be very hard to quantify. But I would tell you immediately we are seeing changes culturally in the organization that are benefiting the organization -- a lot of which are taking blinders off with respect to opportunities, a lot of creativity going on, and moving faster and being more nimble locally.

The home-improvement question is, it's improving, has improved. And our expectations are that it will continue to improve. That's a big component of some of our specialty products that are going into the home-improvement markets, so we expect that to continue to improve and be somewhat correlated to the single-family housing starts.

If I may, I have a question -- maybe this is more in Susan's area. How do you account then for additional SKUs or inventory that would be for various regions around the country? By taste, in essence. How does that feed back into the inventory working capital?

Well, it's certainly a transition process we are working through. What we are finding is, as Mitch alluded to, there is some inventory market that's terrific inventory -- we just need to get it into the right market. So it might've been sent centrally to a location where it would sell beautifully in a region nearby.

So, we like what we've got. It's just a matter of do we have it always in the right place. So that's something we are working through and as you might imagine there's transition to get there, but more importantly going forward, how can we unleash that inventory where, again, it's not in the right place -- free up that capital to invest more deeply into categories that are very performing in that local market.

And our local general managers absolutely know that. They are very clear on what sells in their markets, what brands their customers need. And so, we think that will be a favorable thing for us, but, again, something to work through over time. This decision is really just starting as far as them getting their feet in the water and understanding they have that capability to make those changes. So early days, but we think we've got good inventory. We've just got to give it to the right markets.

Yes, Mark, and I would add that you know as many good entrepreneur would approach it, our GMs are thinking about how to make the most money and get the most return on investment. And a lot of the dialogue is not so much about expanding product categories -- it's shrinking them. Saying, hey, what should we be known for? How are we going to service our customers? What in this market from an aesthetic standpoint does the customer base want? What because of the competitive landscape in this market -- where our suppliers are located? What makes sense for us?

So my natural -- as we are talking through the strategy session I was just kind of like you, wanting to see if everybody was going to say, hey, okay, let's triple my inventory with different product categories, and boy, we'll really sell a lot of stuff. Actually, to the contrary, people -- our team is very thoughtful about, okay, what should I have? What should I be attacking? How should I strategically go after particular identified products to grow the business?

So I've got to ask this question, what would your target be or hope or minimum hope of an improvement in overall margin that this might lead to? And I'm not talking about your gross margin or maybe your contribution margin -- like you say, all in. How many basis points or percentage that we would hope this might bring to the Company?

Mark, we unfortunately don't give future forward guidance. I don't blame you for asking -- good question. Unfortunately, you know I can't answer it.

That's why I say hope. I figured -- I tried (laughter).

We appreciate your interest, Mark. Thank you.

Rest assured, we are on it.

Okay.

There are no further questions.

Okay. Well, great. Well, thank you again as always for your time and for your interest, and we certainly look forward to sharing our continued progress with you in the months ahead. Have a great afternoon.

This does conclude the conference. You may all disconnect.