BlueLinx Holdings Inc.
Q2 2008 Earnings Call Transcript

Published: 29 Aug 2008

[Operator:]

Good morning. My name is Ashley and I will be your conference operator today. At this time, I would like to welcome everyone to the BlueLinx second quarter 2008 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, Wednesday, July 30th, 2008. Thank you. I would now like to introduce Mr. Russ Zukowski. Mr. Zukowski, you may begin your conference.

[Russ Zukowski:]

Thank you, operator, and welcome everyone to the BlueLinx second quarter 2008 conference call. With us this morning are Howard Cohen, Interim Chief Executive Officer; George Judd, President and Chief Operating Officer; and Doug Goforth, Chief Financial Officer. Our press release was issued earlier this morning. For those of you who do not have a copy, it is available in the Investor Relations section of the company's website, 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. Now let me turn the call over to our Interim Chief Executive Officer, Howard Cohen.

[Howard Cohen:]

Thanks, Russ, and thank you everyone for joining us this morning for the BlueLinx second quarter earnings conference call. BlueLinx performed well during the second quarter. We reported net income of $0.21 per diluted share. The company's results for the second quarter were positively impacted by the increases in product prices in numerous categories. While underlying wood-based product prices increased in the first quarter of 2008, they decreased from the comparable prior period. Metal prices, including both specialty fasteners and structural rebar prices also increased from the first quarter of 2008. While we are pleased with our second-quarter results, we do not expect a near-term upswing in the housing market. Current housing forecast suggest that the downturn will be long-term and so we will continue to take appropriate actions in order to manage the business through this downturn. Subsequent to the quarter-end, we made a decision to restructure our LSV Operations. Based on market conditions in California, we decided to exit the custom-build business of LSV, while maintaining the cabinet and contractor-focused business, which are similar in nature to our BlueLinx Hardwoods operations. As I told you on our last call, we are highly focused on managing cash flow. We continue to aggressively manage inventories, receivables and spending and keep tight controls on our cost structure while continuing to be focused on serving the needs of our customers, suppliers and shareholders. We believe our second-quarter results reflect those efforts and, as I mentioned earlier, we will continue to manage our business tightly going forward. I am confident that we will emerge from this downturn well positioned to capitalize on our industry's rebound when it occurs. I would now like to turn it over to Doug Goforth, our Chief Financial Officer, who will walk you through our financial results for the quarter and year-to-date periods. Doug?

[Doug Goforth:]

Thanks, Howard. Good morning to everyone. Starting on Slide seven, overall sales for the second quarter ended June 28th totaled $835 million, down 23% or $247 million from second quarter 2007. Specialty sales declined 20% from the same period last year, with the majority of the decline coming from lower unit volumes. Structural product sales declined 26%, also largely a result of lower unit volumes. Specialty products comprised 48% of total sales, up from 46% in 2007. BlueLinx generated approximately $107 million in gross profit for the quarter. We generated gross margins of 12.9% or 190 basis points higher than the second quarter of 2007. Specialty gross margin of 14.3% compares with 14% a year ago. Structural gross margin of 11.9% compares to 9.3% margin generated in the prior-year period. Structural margins benefited from an increase an underlying rebar prices, combined with well-positioned inventory level entering the quarter. Operating expenses for the quarter totaled $86 million, a decrease of $12 million or 13% from a year ago. The decline primarily reflects decreases in payroll costs related to lower headcount and in other expenses not directly related to headcount. These declines were partially offset by fuel costs, which increased by approximately 30% over the prior-year period. As Howard mentioned, we are tightly managing our costs and will continue to actively manage our costs relative to both current and future business conditions. The company's operating profit for the second quarter totaled $21 million, consistent with the same prior-year period, reflecting the decline in gross profit that was partially offset by the $12 million improvement in operating expense. We reported second quarter net income of $6.6 million or $0.21 per share compared with a year ago net income of $5.4 million or $0.18 per share. The net income is after interest expense of $9.4 million, which decreased by $2.4 million from the prior year, and tax expense of $4.9 million, compared with a tax expense of $3.6 million a year ago. Looking at year-to-date results on Slide eight, sales for the six months ended June 28th totaled $1.6 billion, down 24% from the same period last year. Gross margin of 11.9% showed a 100 point basis improvement over a year ago, reflecting the increase in underlying product prices and an increase in specialty sales relative to structural sales. Year-to-date operating expenses declined 11% from the same period last year, while operating income declined 56%, largely driven by the housing-related drop in demand and lower base structural product prices for the comparable period as well as approximately a 26% increase in fuel cost. The year-to-date net loss of $4 million compares with net income of $5.2 million a year ago. Turning to cash flow on Slide nine, during the quarter receivables increased by $14 million in accordance with seasonal sales growth. This increase in receivables was more than offset by a $36 million decrease in inventories and a $3 million increase in accounts payable also associated with seasonal sales increases. Second-quarter net cash provided by operations of $52 million compares with net cash provided by operations of $13 million in the second quarter of 2007. Cash used in financing activities was $3.9 million for the quarter, driven by a $43 million decrease in outstanding borrowings under our revolving credit facility. For the first half of 2008, we generated approximately $31 million in cash from operating activities compared to a use of approximately $64 million during the first half of 2007. Cash used in financing activities during the first half of 2008 was $16 million, driven by a $17 million decrease in outstanding borrowings under our revolving credit facility. This compares to $71 million provided by financing activities, driven by a $94 million increase in borrowings for the first half of 2007. The resulting cash balance at June 28 was $30 million compared with $25 million a year ago. Moving to Slide ten, we had $271 million available on our revolving credit facility as of quarter end. The combined debt balance of our mortgage and revolving credit agreement was $461 million, a decrease of $43 million from March 29th, largely reflecting an ongoing focus on managing our working capital. Now let's look at inventory on Slide 11. Our second quarter inventory position of $315 million declined 10% from the first quarter and 33% from a year ago as we continue to balance inventory levels with the current environment. Turning to Slide 12, cash cycle days for the second quarter totaled 47. That compares with 54 days for the first quarter and 50 days for the same period a year ago. We continue to focus on tightly managing our AR portfolio and our credit approvals to ensure we are selling to customers who pay us in a timely manner. Inventory days improved significantly as we continue to actively manage inventory levels across the company. In summary, we are highly focused on cash management through tightly managing inventory, accounts receivable, operating expenses, and capital spending. We remain focused on gross margin, and I want to remind everyone that our debt structure allows us to continue to pursue our business plan through an extended downturn. Our debt structure consists of a 10 year fixed rate mortgage of $295 million secured by our company-owned distribution centers and a revolving credit facility secured by inventory and receivables. The revolver is in place through May 7th, 2011, and our mortgage payments are interest-only through July 2011. As noted earlier, we currently have availability in excess of $271 million in our revolving credit facility. Now let me turn the call back over to Howard for some additional remarks.

[Howard Cohen:]

Thanks, Doug. Before turning it over to the operator I'd like to make a few closing remarks. First, we continue to operate in one of the worst housing markets on record. Our primary focus is and will continue to be managing cash flow. We have a flexible capital structure that provides us with liquidity necessary to continue to execute an extended cyclical downturn while positioning the company to be the supply chain solution of choice once this housing correction has run its course. Most housing forecasters still point in the future to a strong, prolonged rebound of the housing market based on the population demographics and other factors. We will participate in that rebound as the leading building parts distributor in the United States. Second, perhaps despite or perhaps in light of the challenging environment, we believe we are becoming more successful in underscoring our value proposition to our customers and getting paid for value we bring to them through our position in the supply chain. I certainly believe that our focus in tightly managing all aspects of our business in this environment combined with the highly dedicated employee base has allowed us to become successful and is allowing us to separate ourselves from our competition. Third, as you are aware, during the second quarter we received a two year advance notice as required under the contract of Georgia-Pacific's intent to terminate our existing supply agreement. This existing supply agreement runs through May 2010. BlueLinx continues and will continue to distribute GP products for the next two years under the existing contract. We anticipate a new contract that is mutually beneficial to both BlueLinx and Georgia-Pacific and will be in place by May of 2010. Also, let me comment briefly on the CEO search. We are in the process of selecting final candidates for the position and the Board of Directors expects to name a replacement early in the fourth quarter. Finally, I would like to publicly thank George Judd, Doug Goforth, Duane Goodwin, and Dean Adelman, and the BlueLinx senior staff on how well they have led their respective organizations during this challenging environment. I am very pleased to be working with this high quality team and all of the BlueLinx people through this very difficult time. Now I'd like to open it up for questions. Operator?

[Operator:]

(Operator instructions) Our first question comes from the line of Steve Chercover with D.A. Davidson.

[Steven Chercover:]

Thank you. Good morning.

[Howard Cohen:]

Good morning.

[Steven Chercover:]

First of all, how do you feel on the second half of the year? Clearly nothing has really improved on housing. Is the performance that you achieved in Q1 – or sorry in Q2, sustainable and are there more cost-cutting measures that you can take to either support or improve results going forward?

[Howard Cohen:]

Well, Steve, first of all as you know the business is very cyclical. I mean I'm learning this from my senior staff as well as you have probably known it over the years. And the second quarter probably has lower volume than the first quarter. We are taking both the appropriate actions on the variable cost side as well as on the fixed cost side to keep our Company in line with the future revenue forecast.

[Steven Chercover:]

With July being now effectively under our belts, how did July feel compared to the second quarter?

[Howard Cohen:]

I'm not sure I am prepared to answer that except to say, Steven, that we are continuing to maintain our focus on both expenses and inventory in the appropriate manner to ensure that we provide the greatest value to our shareholders.

[Steven Chercover:]

Okay. And secondly in terms of trucking, you guys have got a pretty substantial fleet of your own. Are you capturing any sort of fuel surcharge? And have your information systems allowed you to kind of charge people on the backhaul, you know, capture additional revenues from people who are trying to move goods from point A to point B and you can be of assistance?

[George Judd:]

Yes, Steve, this is George. Certainly fuel is a substantial portion of our cost and increasing fuel expenses is a major concern. We have been successful in adding some stop charges, fuel stop charges to our customers. The most important thing is that we try to manage our total return on that stop, either through price or added on charges so that each stop is profitable for our Company. With regard to backhaul, our backhauls do continue to grow and they grow profitably. We try not to have our trucks drive empty. You know it costs almost as much to run an 18-wheeler without a load on it as it does with a load on it. So we have used our fleet more effectively than in the past.

[Steven Chercover:]

Do you consider the truck fleet to be a cost center or profit center?

[George Judd:]

We think it is a strategic advantage for our customer service and our overall delivery proposition.

[Steven Chercover:]

Thank you very much.

[Operator:]

Our next question comes from the line of Robert Trout with Goldman Sachs.

[Robert Trout:]

Thanks. Good morning guys.

[Howard Cohen:]

Good morning.

[George Judd:]

Good morning, Bob.

[Robert Trout:]

Good morning. I was wondering if you would be able to tell us what the revenue contribution from rebar was in the second quarter.

[George Judd:]

Robert, it’s George. We don't want to break out our products within structural or specialty. We have a large audience listening. Rebar is an important product code for us, as are roofing and fasteners and many other products that we are winning share with.

[Robert Trout:]

Okay. Then, perhaps approaching it in a different way, I think your margins in that segment went from about $8.6 million to $11.9 million. Could you maybe approximate how much of that was due to rebar because I know that it was up pretty sizably pricing-wise during that quarter?

[George Judd:]

Yes, we had large increases in all steel products. We also had large increases in OSB year-over-year and quarter-over-quarter and we had increases in lumber and plywood in Q2. So all of our structural products had some inflation, led by rebar, and a significant portion of the margin increase was due to the activities and actions that we take in managing the business and through price inflation.

[Howard Cohen:]

I would say this though, Bob, that I think that more of the improvement in margins came from the discipline within the organization and how we are providing our value proposition to our customers than in any external price improvements that we are receiving in the marketplace.

[Robert Trout:]

Okay. Okay. Thanks. Shifting topics, on just the outlook for supply-demand balance within wood products, a significant percentage of North American OSB has come out of the market in the last year and I think at year-end the industry forecasters were saying that operating rates in OSB were about 60%, 65%. And yesterday we heard from a big OSB producer who said that they were going to continue to rationalize capacity as needed. From you guys' vantage point, do you guys think that enough capacity has come out at this point, specifically on OSB, to match the current demand environment? Or do we have a lot more that needs to come out?

[George Judd:]

I certainly think the large OSB producers – and I did listen to the calls yesterday – have a better view of whether or not the industry is rationalized than we do. But BlueLinx certainly supports our manufacturers in rationalizing their supply. We think they have done a nice job. The market and whether it continues to contract or it’s found bottom and then the age of the mills matters. So the older mills are being rationalized and the newer, more cost-effective mills are running. We support all of that and we think that thank goodness that they have done that from the OSB pricing perspective.

[Robert Trout:]

Okay. Okay. Thanks.

[Operator:]

(Operator instructions)

[Howard Cohen:]

Okay. Well, I guess we have answered all of your questions and we certainly appreciate your attendance on this call, and we look forward to talking to all of you next quarter. Thank you very much.

[Operator:]

This concludes today's BlueLinx second quarter 2008 earnings conference call. You may now disconnect.