Maryon Davis – Director Finance & IR
George Judd – President and CEO
Doug Goforth – SVP, CFO and Treasurer
BlueLinx Holdings Inc. (BXC) Q2 2010 Earnings Call Transcript August 5, 2010 10:00 AM ET
Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the BlueLinx second quarter 2010 conference call.
All lines have been placed on mute to prevent any background noise. (Operator instructions) As a reminder, ladies and gentlemen, this conference call is being recorded today, Thursday, August 5, 2010. Thank you.
I would now like to introduce Maryon Davis with BlueLinx. Ms Davis, you may begin your conference.
Thank you, Brandy. Welcome ladies and gentlemen to the BlueLinx second quarter 2010 conference call. With us this morning are George Judd, Chief Executive Officer; and Doug Goforth, Chief Financial Officer. Our press release was issued earlier this morning. A copy of the release is available in the Investor Relations section of the company’s Web site at 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 or 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 Web site. 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 Chief Executive Officer, George Judd.
Thanks Maryon. Good morning everyone and thank you for joining us today. Let me open the call with a brief comment on the announced tender offer for the outstanding shares of common stock to BlueLinx Holdings Inc. by servers ABP, investor LLC or CAI. Our board of directors has appointed a special committee of our independent directors to evaluate the transaction and develop a recommendation to our stockholders regarding this tender offer. In light of this, the company will have no comments concerning the tender offer and will not take questions after our prepared remarks.
Thank you for your understanding, and with that I will turn the call over to Doug Goforth, our chief financial officer.
Thanks George. I will start with a brief overview of the quarterly results followed by a more detailed financial review. Then George will provide an operations review of the quarter and close with the final perspective. Let us begin with the quarterly overview.
The second quarter business climate was characterized by unprecedented volatility in the structural wood-based products market and a sluggish recovery of demand for products related to new home construction. For the most part, our customers continued to conduct business with very lean inventories in response to a slow spring in summer construction season. Against these head wins, we operated our structural product business to minimize the impact of sharp price movements while focusing our growth efforts in the specialty products area.
Overall unit volume grew 11.9% compared to the year ago period with both specialty and structural product group showing increases. Specialty volume grew 13.5% as we continued to focus on increasing our share of value-added products. Structural products grew 9.7% on strong lumber and plywood volumes.
Overall gross margins was 11.9% for the quarter, up from last year’s 11.4% due to specialty product margin expansion and growth in our out of warehouse business. We believe our gross margin performance is one of the key indications that BlueLinx is operating effectively in a difficult environment.
For the second quarter of 2010, we reported a net loss of $3.4 million or $0.11 per share on revenues of $541 million. During the quarter, we used $34 million in cash for operations, and we had approximately $176 million in excess availability at the end of the quarter with a cash balance of $19 million. Our net debt was approximately $366 million, up $35 million from the prior quarter largely reflecting seasonal increases in working capital.
Now for a closer look at the quarterly financial results, to those of you following along with the slides posted on the Investor Relations section of the BlueLinx Web site, I will begin with slide 5. Overall sales for the quarter ended July 3 totalled $541 million, up 28% or $117 million from the second quarter of 2009. Specialty sales increased 14% year over year with the majority of this increase coming from increased volume. Structural product sales increased 45% over the same period last year. This increase was driven by 35% year over year increase in product selling prices complemented by 10% increase in unit volume.
Benchmark rates of wood-based structural products increased approximately 34% over the prior year period reaching peak levels early in the quarter and dropping rapidly before stabilizing in June. Specialty products comprised 52% of total sales down from 58% in the second quarter of 2009, largely due to increase in selling prices for structural wood products.
BlueLinx generated $64.1 million in gross profit for the quarter. Our improvement in gross margin performance benefited during the quarter from shifts in our channel mix. Compared with the same period last year, revenue flowing through the warehouse increased, while lower margin direct ship revenue decreased. Gross margin was 11.9%, which is up 0.5% from prior year quarter, with specialty margins showing a 2.9% increases over the prior year quarter accounting for 80% of the $15.8 million gross profit increase. Structural margins contracted to 9.1% from 10.3% in the prior year quarter, as a result of the sharp decline in the prices for these products during the quarter.
Operating expenses for the quarter totaled $60.5 million for an increase of $22.8 million or 60.4% from 2009, which benefited from $20.5 million in gains from significant special items including the yearly termination of the Georgia-Pacific supply agreement. After adjusting for the significant special items, operating expenses increased 3.9% compared to a year ago. The remaining variance includes increases in commissions resulting from gross profit improvement, higher fuel and other logistics cost as we ship more products to the warehouse and lower bad debt expenses we experienced more normal levels. The overall level of expenses in the quarter reflects the company’s focus on growing revenue faster than our operating expenses.
The company reported operating income for the second quarter of $3.6 million compared to operating income of $10.6 million in the prior year period reflecting a $15.8 million increase in gross profit, and $22.8 million increase in operating expense. Our second quarter net loss of $3.4 million or $0.11 per diluted share compares with a net profit of $628,000 or $0.02 per diluted share in the second quarter of 2009, which included a pretax net gain of $19.4 million in significant special items.
Our reported net income for the period is after interest expense of $7 million, which includes $1.3 million in non-cash interest income related to our interest rate swap compared to interest expense of $9.6 million in the prior year period, which included $1.1 million in non-cash interest expense related to the interest rate swap. Both the current year net loss and the prior year net income include immaterial tax provisions.
As discussed last year, during the first quarter of 2009 BlueLinx provided a valuation allowance for 100% of its US deferred tax assets. As a result, the company’s tax provisions in future periods consist of income taxes on earnings of its Canadian operation and certain state income taxes but generally will not include any income tax benefit related to its US operation.
Looking at year-to-date results on slide 6, sales for the six months ended July 3 totalled $971.8 million, up 17% from the same period last year. Gross margin of 12% increased from 11.1% in the year ago period. Year to date, reported operating expenses increased 20% from the same period last year, which benefitted from $19.4 million in gains from significant special items. The resulting operating loss of $4.4 million was largely driven by the housing related drop in demand.
EBITDA improved $1.3 million over the prior year period largely due to the increase in gross profit and reflects our ongoing commitment to cost management and operational efficiency. The year to date reported net loss of $18.1 million or $0.59 a share compares with a net loss of $60 million or $1.93 a share.
Turning to cash flow on slide 7, during the quarter, we used approximately $34 million in cash from operating activities, primarily reflecting increased receivables in accordance with rising sales, seasonal increases in inventory as well as increases due to strategic buys in certain category to support our specialty growth initiatives, which were partially offset by a corresponding increase in accounts payable. This compares with net cash provided by operations of $11.2 million in the second quarter of 2009.
As we have discussed on prior earnings calls, we will continue to tightly manage our working capital items on an ongoing basis however, we expect to consume cash as our working capital grows to support an improving business. Cash provided by financing activities was $40 million for the quarter, driven by a $44 million increase in revolving credit facility, and $3.7 million increase in restricted cash related to the mortgage. The resulting cash balance at July 3 was $18.8 million compared with $53 million a year ago.
Moving to slide eight, we had $176 million of excess availability under our revolving credit facility as of quarter end. The combined debt balance on our mortgage and revolving credit agreement was approximately $410 million, an increase of $44 million from the first quarter 2010, reflecting seasonal working capital requirements, Net debt at the end of the second quarter was $366 million compared to $331 million at April 3, and was up approximately $67 million from a year ago.
Subsequent to the quarter end, we entered into an amendment to the company’s revolving credit agreement. The amended facility provides for borrowing capacity of up to $400 million and matures in January 2014. In addition the amended credit facility provides for an additional $100 million uncommitted accordion [ph] credit facility, which would permit the company to increase the maximum amount of borrowing capacity up to $500 million.
Turning to slide 9, cash cycle days for the second quarter totalled 49. That compares to 49 days for the first quarter of 2010 and improved four days compared to the same period a year ago. Our performance in this area reflects our daily efforts to manage our working capital risk by selling to the most profitable customers keeping the right inventory on hand and paying our supply partners in a timely fashion.
Now, let me turn the call over to George.
Thanks Doug. Second quarter business conditions remain challenging for our industry and for BlueLinx. Housing starts [ph], which our business is closely tied to are slightly above the trough levels evidenced by 11.5% increase in second quarter housing starts from a year ago.
We faced these challenges by continuing to focus on our long-term growth objectives. We experienced successes in our specialty business and challenges in our structural business. Against the backdrop of continued sluggishness in the housing markets, we executed our specialty business, our specialty products strategy well. Our long-term strategic objective is to profitably grow our specialty revenues to 60% of total sales. Specialty offers higher margins, less price volatility, and is well suited to our unique centralized distribution platform and our national sales force in our solutions based value proposition.
For the quarter, we grew specialty unit volumes 13.5% over the prior year quarter and expanded gross margins 2.9 percentage points to 15.5%. I am pleased with our specialty products performance and our ability to achieve record specialty quarterly gross margins. We did this by executing on targeted specialty growth initiatives for value added products by leveraging key strategic partnerships and by adding value to our customers with quality products delivered on time as promised.
Our number two objective is to manage our structural business for profitability. In the second quarter this meant managing the business to mitigate the negative impact of wood-based structural product price volatility. Prices were benchmark graded to plywood, OSB and lumbar rose between 5% and 46% from the end of March through the end of April, and then fell sharply decreasing between 19% and 48% from the end of April through the end of June as demand fell off sharply resulting in gross margins declining 1.2 percentage points compared to the second quarter of 2009.
Plywood and lumbar volumes were up during the quarter, however we have seen our lower margin OSB business decline as we have focused our selling efforts on more profitable product lines. Overall, I feel we navigated through this unprecedented price inflation, and then even more rapid deflation more effectively than we have in the past.
Finally, we remain committed to achieving our third objective, which is to outgrow the market over time. We remain focused on making the appropriate investments for long-term success. Our organization is focused on these three things, aggressive pursuit of specialty sales, effective management of structural and share growth over the long term. As we execute our strategy we remain highly focused on managing the risks associated with the current business environment. We will continue our focus on working capital management and on controlling costs.
During the quarter, BlueLinx’s inventory and logistics network and logistics network provided our customers with the products they needed. We continued to balance inventory levels with the demand environment while also continuing to support new products and vendors as part of our ongoing focus on specialty products growth. We kept our operating expenses in line with our current business environment. Overall operating expenses for the quarter increased 3.9% after adjusting the prior year quarter for significant special items compared to 11.9% increase in unit volumes.
As we have done since the housing market downturn began over four years ago, we have tightly managed our accounts receivable portfolio and credit approval processes. Our bad debt expense is down 75% over the prior year quarter. We continued to aggressively manage inventories, receivables, and keep our tight controls on our cost structure without diminishing our ability to achieve our business objectives.
In May we added Joe Costello [ph] to our senior management team as senior vice president of our western regions. Joe is a former senior executive with several other companies, most recently Louisiana Pacific. He will lead our Western operations, which have been performing below their potential. I am excited to have someone of Joe’s caliber joining the BlueLinx team, and look forward to his leadership as we work to facilitate growth in our Western operations. There continues to be uncertainty around the macro economic factors that drive our business. I believe when consumer competence rises and unemployment rates decline, we will begin to see sustainable improvements in the housing market.
In closing, we cannot control the external environment but we can work to ensure our company is well positioned in this challenging environment, and ready to capitalize on opportunities as business resumes a more normal phase. Guided by our long-term objectives, I believe the actions and decisions we are making each day position BlueLinx for long-term success.
That concludes my remarks, thank you for joining the call this morning. Operator?
Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.
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