Bluelinx Holdings Inc (BXC) 2014 Q4 法說會逐字稿

Good morning. My name is Jennifer, and I will be your conference operator today. At this time, I would like to welcome everyone to the BlueLinx fourth-quarter 2014 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 session. (Operator Instructions). Thank you. And Ms. Caroline Lowden, you may begin your conference.

Thank you, Jennifer, and good morning, everyone. Thank you for joining us for the BlueLinx fourth-quarter 2014 earnings conference call. This call is being webcast on the Company's website at www.bluelinxco.com. The earnings release and presentation slides for this call can be found in the Investor Relations section of the Company's website.

Joining us on the call today are Mitch Lewis, CEO, and Susan O'Farrell, CFO. Before I turn the call over to Mitch to discuss our current results, I want to remind you that this presentation includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about our future operations and financial performance. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from those provided, including, but not limited to, those identified in our press release and discussed in our filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to revise them in light of new information.

Today's presentation includes references to non-GAAP financial measures. The reconciliation of these to the most comparable GAAP measure is included as an appendix and is posted on our website at bluelinxco.com.

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

Thanks, Caroline, and good morning. I would like to talk briefly about the highlights of our fourth quarter and what we are currently seeing in our markets, and then I will turn it over to Susan who will walk you through our financials in more detail.

Our fourth quarter was another solid quarter in which we continued to enjoy momentum compared to our prior year performance. This now makes six quarters in a row where we have outperformed our prior year adjusted EBITDA. Our adjusted EBITDA in Q4 of $1.9 million is a $2.9 million improvement from the fourth quarter in 2013, but more importantly, it is the first time we have had positive adjusted EBITDA in the fourth quarter since 2006.

Our full-year performance of $24.6 million in adjusted EBITDA was also a nice improvement. It is $23.3 million more than 2013 and the best annual adjusted EBITDA we have had at BlueLinx in seven years. There are many areas that we have been working on that have contributed to this improvement, but I will let Susan discuss these in more detail.

While our adjusted EBITDA improved, our revenue for the quarter declined by 3% from 2013 levels on a comparable basis. You may recall that we had an extra fiscal week of sales in 2013 with a 14-week fourth quarter, which impacted our comparative sales by approximately $20 million.

We are also a little surprised by the scale of the decline of revenue during the winter holidays at the end of December. It appears that the timing of the holidays effectively shortened our last two fiscal weeks to only two and a half workdays each week. Even with the decline we experienced at the end of the year, during the fourth quarter, when you account for the additional week in 2013, our specialty products sales were relatively flat compared to 2013.

We did continue to see a degradation in our structural products during the quarter, which approximated 5.5% on a comparative basis.

I want to read reiterate again that our goal is not to focus on the sales of our specialty products to the detriment of our structural products. We are committed to being a full provider of building products to our customer base, and this means that we are also committed to being an excellent supplier of structural products as well.

In 2015, our strategy is not to change the relative percentage of our structural and specialty product sales. Rather, we will continue to focus on growing our market share with our existing product portfolio that adds value to our customer base.

Our sales in January this year were consistent with this approach as we enjoyed similar levels of year-over-year growth in both our product segments.

It now appears that our end markets will help us in 2015. Although the weather over the last couple of weeks across the US has been challenging, there definitely appears to be a higher level of confidence in the market than a year ago. Our customers and suppliers generally feel that a continued improvement in single-family housing starts is now likely. And while we are not confident that single-family housing starts will enjoy the 20%-plus increase that fuel economists are predicting, we do expect at least a modest improvement in 2015. And January was a good reflection of this optimism, and we expect this trend to continue.

We also remain focused on establishing a solid capital base for the Company for the future. Yesterday, we announced the extension of our working capital facility. Susan will discuss the details of this extension, but I would like to thank our bank group who have consistently supported BlueLinx and, again, demonstrated the confidence they have in partnering with us as we continue to improve our performance in the years ahead.

Our logistics and operational emphasis also continues to gain momentum. We are highly focused on increasing efficiency throughout our supply chain, and we have begun the year with a 3% reduction in our logistics cost even as our sales have increased.

We have specific measurable objectives to improve several areas of our operational performance in 2015, and we are making good progress earlier in the year.

The one area where our logistics team has been opportunistic is in connection with the decline in oil prices. We view the recent oil decline as a positive event to the economy in general, as well as to BlueLinx. The increased cash to consumers and the resultant improvement in consumer sentiment should positively impact the general economy. And ultimately, we believe it will also positively influence remodeling activity in the US as well.

Our logistics team reacted to the oil decline, and we made the decision to lock in prices pricing for approximately 90% of our forecasted fuel purchases for 2015. We anticipate this decision will save BlueLinx over $2.5 million in 2015 compared to our 2014 fuel costs.

We are also making good progress on our strategy to drive our organization toward a local market and customer orientation. In addition, a recent training for our local market leaders, we have established local strategic initiatives and targets tended to effectively grow our business through local share gain.

We have also initiated a more collaborative approach with our supply base. We understand that it is in our best interest to help improve their performance in our markets as we work together to grow their respective brands and market positions.

I now have one year under my belt as CEO of BlueLinx, and I think we have made good progress in the last 12 months. We have made several key personnel moves at the executive level of the Company. We have changed the organizational structure to ensure an adequate focus on the opportunities we have to improve our operational investments, efficiency and service. We have embarked on a new strategic emphasis to focus our business at the local level, enabling us to be closer to our customers and markets while we make decisions locally where the expertise lies.

Our emphasis on understanding our contribution margin by markets, products, and customers is leading to good decisions regarding which opportunities to pursue within the organization. And the improvement in our results by over $23 million from last year is a good indication that these initiatives are beginning to add value.

But, as I have said before, we are just getting started. The cultural change we have begun takes time to fully execute within an organization.

In addition, we will continue our relentless focus on operational improvement while we garner back market share we have lost over the last several years.

At the same time, we are exploring a greater emphasis on attractive markets to help drive our organic sales growth as well. It is very clear that opportunities abound at BlueLinx.

I would like to personally thank our associates for their collective efforts, which enabled us to enjoy the turnaround we experienced in 2014. Our team has moved quickly to realize opportunities to drive improvement at our Company, but the organization understands that 2014 is now over. It is in the past. So we are moving ahead and focusing on the future, and we look forward to sharing with you more positive results from these efforts in the months ahead.

And now I would like to turn it over to Susan who will discuss our performance with you in more detail.

Thank you, Mitch, and good morning, everyone. It is a pleasure to speak to you today about our business, as well as our fourth-quarter and full-year results.

First, I would like to comment on the status of our capital structure. As Mitch mentioned, we are pleased to share with you that we successfully extended our US revolving credit facility of $447.5 million until April 2017, along with our Tranche A $20 million loan facility until June 2016. This demonstrates the strong support of our lending partners and their continued confidence in the improvements we have made in our business.

We had approximately $60 million in excess availability under our asset-backed revolving credit facilities at the quarter end. That was approximately $14 million above December 2013.

As we work through establishing a strong foundational long-term capital structure, refinancing our existing mortgage is still a key part of that strategy. The value of our real estate as appraised in 2006 was approximately $322 million.

Over the past eight years, we have since sold 10 properties, which collectively have sold for almost 15% over the 2006 appraised value. Our mortgage balance as of January 3, 2015, of approximately $172 million, including our prepaid principal, represents a significant amount of value still available to unlock. We continue to evaluate various scenarios for ultimately replacing our real estate financing and look forward to sharing more with you on this status of our mortgage in the future.

As Mitch already highlighted, we are pleased with the continued progress for our business. Our fourth quarter continuing our record of success over the past year, we delivered more EBITDA in 2014 than we did in any year since the housing downturn began in 2007. This is a testament to the hard work for our associates and bodes well for our continued progress in the future.

Moving to slide 11, we will take a look at our revenues and profitability for the quarter and for the year. Because the fourth quarter of 2013 had the 53rd week, we will look at the components of our revenue on a comparable net sales basis.

Revenue on a comparable basis for the fourth quarter ended January 3, 2015, was down 3% or $12.9 million compared to the fourth quarter of 2013 of $467.1 million. The decrease over the comparable fourth-quarter 2013 was due to lower volumes in our lumber and rebar categories. Revenue on a comparable same center basis for the full-year 2014 was down 3.3% compared to $2,047.2 million in 2013.

On a comparable basis, gross profit for the fiscal fourth quarter was $49.8 million compared to $52.3 million in the fourth quarter of 2013. Gross margin for the fiscal fourth-quarter 2014 was 11.0%, down from 11.2% in the fiscal fourth-quarter 2013. This decline was primarily due to a decrease in the lumber market compared to the year ago period. Even with the commodity price changes, we are pleased to see progress against our margin enhancement activities and our specialty categories with an increase of 20 basis points from the previous year.

Fiscal 2014 gross margin was up approximately 100 basis points to 11.6% versus fiscal 2013 gross margin of 10.6%. The structural and specialty products showed improved gross margin for the year with structural gross margins up 109 basis points and specialty growth margins up 50 basis points from fiscal 2013.

On slide 12, our operating expenses in the fourth quarter were $50.4 million compared to $58.1 million in the same period a year ago. Expenses for fiscal 2014 were down $34.3 million or 13.7% at $215.5 million compared to $249.8 million in fiscal 2013. The improvement in operating expenses year over year is due to significantly lower restructuring costs, over 100 fewer headcount, less payroll-related costs, and additional cost efficiencies in the logistics area of 2014.

We continue to invest in our associates through our training initiatives, and as a result, we had the best sales per headcount since 2007.

Further, we shared with you previously the addition of four regional directors of logistics, and we are beginning to see the impact in the savings within our business. Our third-party freight costs were down approximately $4 million in 2014.

Additionally, our operations teams saved approximately $250,000 in 2014, specifically from initiatives to lower our rail and truck costs, including renegotiation rates and auditing historical invoices. We anticipate an additional $250,000 in savings in 2015 from these activities.

Continuing on slide 13, when you look at margin improvement and expense control for 2014, we are able to drive adjusted EBITDA up by $23.3 million to $24.6 million. That is an increase of $1.3 million of adjusted EBITDA from fiscal 2013. Adjusted EBITDA for the 2014 fiscal fourth quarter was $1.9 million from an adjusted EBITDA loss of $1 million from the same period a year ago.

On a comparable basis, Q4 2014 adjusted EBITDA was up $1.8 million from Q4 2013 adjusted EBITDA of $0.1 million, excluding the 53rd week. You will see for the quarter we had a net loss of $7.6 million or $0.09 per diluted share for the fiscal fourth-quarter 2014. Our net loss in Q4 2013 was $2.5 million, but included an $8 million non-cash, tax benefit due to the valuation of the Company's pension plan. Without this reported gain, the net loss for 2013 would have been $2.9 million lower than 2014.

Further, our net loss for fiscal 2014 was $13.9 million or an improvement of $26.7 million from our fiscal 2013 net loss of $40.6 million.

Turning to cash flow on slide 14, our cash used during the year was $20.3 million, an improvement of $27.6 million compared to 2013 usage of $39.9 million. The decrease in cash used by operating activity primarily reflects our improved earnings over the year compared to 2013.

As a reminder, our capital expenditures are relatively small -- $3 million for 2014, primarily these investments in tractors, trailers, as well as enabling workforce technology solutions. Specifically, the tractor capital investment is actually close to cash flow neutral as we are able to remove older equipment from our fleet that were maintenance intensive, as well as we enjoyed the better miles per gallon from the new tractors.

As we turn to slide 15, our cash cycle days for the fiscal fourth-quarter 2014 totaled 65 days. Period-ended working capital was down $24 million as of the end of the fourth-quarter 2013. As I look back on the year, I am encouraged by the traction on our strategic initiatives as I translate to our bottom line.

That concludes my remarks. So with that, Jennifer, we would like to open up the line to any questions we might have at this time.

(Operator Instructions) Tristan Thomas, Sidoti.

A couple questions. First, regarding the decline in structural products, is that simply you guys lost (inaudible) sales through the holidays, or were you maybe declining some sales that didn't meet your margin requirements and maybe just provide a little more color on that?

Yes. Sure. I mean, some of it, as I alluded to, was in the last couple of weeks where we -- the holidays fell on a Thursday, so we effectively lost the back end of the day on Wednesday, Thursday, and Friday, which we really didn't anticipate and obviously did not see in 2013.

We continue to -- as you know, in 2013, we had a strong emphasis early to move a lot of structural products built up inventory in that regard and then had to move out of that position. So there is an element there. But, at the same time, Tristan, it is a reflection of changing the organization to focus more on generating profitable sales, irrespective of what the product categories are. And so there is an emphasis which we are now starting to see of selling all of our products that are value add to the customer, so. And we are feeling good about what we saw in the fourth quarter by not being a continuing cycle for the Company going forward.

Okay. Are you seeing maybe any tangible results from trying to really empower your general managers to kind of get closer in the local markets? I mean, has that really taken hold yet, or is that something that is going to play out a little more in 2015?

No. We're already starting to see results. But when I think about your specific examples, they feel more like early in the year events. We had competitive situations where the general managers work quickly and were able to either garner this year or protect existing customers. I think in the past it might have been unwieldy with the structure that we had.

So I think we are starting to see it now. I think the real result just dig in, as I mentioned. When you make a fundamental cultural shift like we are making in the Company, it does take time. But we are now starting to see the benefits of that. I would not say that there were a lot of EBITDA benefit or bottom line benefit in the fourth quarter of last year, but we are certainly starting to see that now.

Okay. Just regarding the weather, is that going to have a meaningful impact on your first quarter of 2015 results, or are you concentrated in enough regions that haven't been affected by all the snow that maybe it is just going to be a slight hiccup?

So weather is always interesting because you don't really know through the quarter how it ultimately impacts you. Generally, it obviously hurts when you have the kind of weather, particularly in the New England area, that we had, but then it ultimately tends to drive demand.

So the question often is when the weather breaks. From a comparative standpoint, the other thing is, don't forget last year at this time, it was worse across the country than we have experienced so far this year. I mean, obviously, pockets of the country are different, but on a consolidated basis, last year was more problematic from a weather perspective.

So I know that is a waffling answer. I think the bottom line is, as I mentioned, we are out of the gates, and we feel good about that from a revenue standpoint in January. And our expectations are that we are going to continue to do well this year. But where it actually falls in the next 30 to 60 days, it is hard to tell at this point.

Okay. Just one final question just for myself. If you do unlock value in the mortgage, that is going to be used to pay down the revolver, correct?

Absolutely, Tristan.

Alan Weber, Robotti & Co.

First question was, when you talked about the real estate, I missed what you said the appraised value was.

So in 2006, we had appraisals done, and since then we have actually sold 10 properties. So if you take the pro rata portion of the rating, it is about $322 million would be the appraised value in 2006.

$322 million of the remaining properties.

Yes. That is (multiple speakers) prorated amount. And so we get comfort in that appraisal because it is certainly dated. And as we look to refinance, we will at that time do the appraisals. Obviously, we do the appraisals in advance. We can't use them. We will have to have the appraisals done at that time, but that is why we look back at what we have sold those properties for over the past eight years to get comfort around where that appraisal was. We will get fresh appraisals when that's time.

Okay. Great. And then, my question on -- when you look at the quarter and you look at the year, the improvement in EBITDA basically came from the reduced expenses relative with sales kind of being down or flat. I was just wondering what you see in 2015 in terms of revenue, whether you see growth or where you really stand there, and how much more reduced expenses can we see in 2015?

So let me answer it a couple of ways. For 2014 in addition to the expense reduction, we also, as you know, had a gross margin improvement. So we are really focused on that. We talked about organizationally the best opportunity when we buy so much material, and such a high percentage of our overall cost structure is to work hard on improving margin across the Company. So -- and that is gross margin.

So we will continue, of course, to emphasize that. And, as we have talked about in the past, we are really focused on the contribution margin. So we want to make sure that we are attacking opportunities that we have that are incrementally profitable to the Company.

And so that is clearly an opportunity. That touches not only the gross margin level, but also the operating cost as well.

As it relates to 2015, we are typically reluctant to give guidance about that -- about the performance of the business. Generally I would say, in all areas of the business, it is a core value for BlueLinx to continuously improve. And so we will look at opportunities to be more efficient, but we certainly don't have the view that there is wide scale opportunities to slash SG&A in this business at all.

Okay. And I realize you don't want to give guidance, but at what point do you think your EBITDA actually will exceed interest expense or cash interest?

Well, we generally don't give guidance, but I can tell you we understand that is very important, and we are working hard to get there. And we are making good progress, and we will continue to make good progress.

Mark Kaufman, Donnelly Capital.

As pertains probably to the last question, do you think you have the right footprint now going forward with your distribution centers? And just thinking about it regionally, is there any impact from the change in oil prices on a negative basis that you might think of?

So that is a great question. I would start with answering it this way. From a footprint standpoint, we actually, in the last year, closed two facilities. They were small facilities; not a lot of revenue. And they were local or regional decisions to do that. So it didn't impact our international customer base and certainly didn't materially impact the business.

We have talked about, internally -- and I think it is important from a perspective standpoint to understand that we view we have overall market share for our products of less than 10%. And so as you look at opportunities within BlueLinx, there is tremendous market share gain opportunities. And now that we have embarked on this new strategy to go local, we are really reluctant to do a short-term, full-scale review of our landscape and footprint when we have such low market shares. Because we view the opportunities where we are and we know the opportunities of where we are are tremendous. And so we want to really attack that.

So certainly short-term we don't view that there is going to be a whole scale review of the footprint that we have, and we will continue to try to gain share at the local level.

As it relates to oil in particular, Texas is often talked about as a potential risk. It is interesting when you look at the Texas market today versus where it was the last time there was a bust, it is much less reliant on energy than it was before. And, in fact, I think I saw just recently in the last couple of weeks an economist who was estimating the economy as well under 15% now. Reliant on energy, generally.

And so there are pockets like Houston from a metropolitan standpoint that is more reliant, and I think that will likely impact that economy. But we go back to the point that we don't have a dominant market share anywhere across the country. And so when you have such a small share in a highly fragmented market, our challenge to the team is irrespective of what is going on in the end market, so let's grow our share and get the business bigger.

(Operator Instructions). Alan Weber, Robotti & Co.

When you talk about some of the cultural changes -- and I guess you have been there about a year, you said. So could you talk about the impact it had on revenues at the local branches whether some of the changes actually, you think, might have indirectly created some of the reduced revenue due to more focus on margin and like that?

Well, yes. I would say for sure, when you compare it to 2013, it impacted our structural sales volume. So there was, in the second quarter of 2013, there is a real emphasis to grow share on commodity-based products, and so we didn't have that in 2014. We wanted to make sure that we were selling product that was incrementally profitable on a contribution margin basis.

So we were not -- we did not have a strategy in 2014 to just grow volume. But that, I wouldn't say, was a local strategy change. That was more of a contribution margin change in looking more closely at the potential profitability of the products we sold.

In addition, there was a strategy that turned out to be a timing problem in 2013 where we beefed up on our inventory levels for structural products that we had to move off of. And, in doing that, from a comparative basis, when you look at 2014, the comparative -- the comparison obviously is hurt by the incremental volume that we had in 2013.

So generally, I would say, yes, looking at product opportunities from a profitability standpoint, compared to 2013, we did sell less in 2014. But the fundamental cultural shift that we have in the Company is not negatively impacted nor should it negatively impact our top line growth.

Now, if I understood correctly, is it now at the local level the general manager actually has -- is it a real-time understanding of his gross margin and what products are profitable compared to where it was previously?

Yes. So there were -- there is great information that we have at BlueLinx; I mean really fantastic information systems. So there has always been excellent data and information that a general manager has related to gross margin. There has not been great data relative to contribution margin.

So we have kind of missed the cost to serve piece of that over the last couple of years. So that is a change, that they have much better information and data than they had historically.

The second piece of it is that there were decisions that were made by the executive team to get into products or whether it was grow share or pricing that were pushed down to the organization that might make a lot of sense in certain territories within the Company but don't make sense in other areas. So that is a shift as well. I mean, we are being much more collaborative quickly with our general managers to make sure that any decisions or opportunities that we get and we can take advantage of from economies of scale are fully supported at the local level.

Okay. And here is my final question. They say it is early about the EBITDA and interest, you don't want to give projections. I mean, at the current level of housing starts, can you -- I mean, how do you see things over time? Can you improve the gross margins and gain market share to get to the point where EBITDA can exceed the interest, or do you need improvement in the overall end market?

Let me answer that n two ways. That improvement in the overall end market -- and I know we have data on file. I think you can see it on our website that shows generally we estimate that for every 100,000 incremental single-family housing starts, that it drops approximately $22 million of EBITDA to the bottom line. And so obviously, if the end markets -- I should say, when the end markets recover, we feel real good about the prospects for the Company.

The second piece -- and we talk about this a lot internally -- is an incremental gross margin of 1% to the Company on our scale is very important. And so there are opportunities to do that, and a lot of those opportunities also are implied within the cost to serve, where we need to make sure that we are getting value for the service that we provide, and there are lots of opportunities to do that.

So, in addition to the operational savings that we have talked about, the efficiency that we have talked about, the share growth that we expect, irrespective of what happens with the end markets, our chore is to make darn sure that we improve the performance of this business that we cover -- certainly cover our cost of capital going forward, irrespective of what the end markets do.

And then -- I appreciate the answer. And that $22 million EBITDA relative on 100,000 incremental housing starts, is it based upon historical data you had, or is that kind of the way you think you are positioned today?

Yes. So we looked at our historical data going back, gosh, more than seven years, looking at how our business has performed because we are closely correlated to housing starts. I would say a little bit different in 2013 because of what Mitch described. It was just going after our growing market share, not necessarily in a profitable way. So I would say there was a decoupling in that year. But, in general, we have used historical data and looked at current run rates. And that is the information that we have on our website that you can look at.

Okay. Great. And I guess, though, actually, with the improvements you are making, one would hope that actually if you got that kind of rebound, the end market, you could do better than $22 million.

Yes. The $22 million was looking at a historical basis. And so if we were improving the performance of the business, if you want to make an assumption that, as demand increases, suppliers, including us, really have an opportunity to expand margins, then that would be accurate.

(Operator Instructions). And we have no other questions in queue at this time.

Okay. Thank you, Jennifer, and thanks for your time today and, of course, your continued interest in BlueLinx, and we look forward to sharing our progress with you in the months ahead.

Thank you. This does conclude today's conference call, and you may now disconnect.