BlueLinx Holdings Inc. Q1 2008 Earnings Call Transcript

| About: BlueLinx Holdings, (BXC)

BlueLinx Holdings Inc. (NYSE:BXC)

Q1 2008 Earnings Call Transcript

May 1, 2008 10:00 am ET

Executives

Russ Zukowski – VP of Finance and IR

Howard Cohen – Chairman and Interim CEO

George Judd – President and COO

Doug Goforth – SVP, CFO and Treasurer

Analysts

Steve Chercover – D.A. Davidson & Co.

Keith Hughes – SunTrust Robinson Humphrey

Bob Trout – Goldman Sachs

Operator

Good morning. My name is Christy, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the BlueLinx first quarter earnings release conference call. (Operator instructions) As a reminder ladies and gentlemen, this conference is being recorded today, Thursday, May 01, 2008. Thank you. I'd now like to introduce Mr. Russ Zukowski with Investor Relations. Mr. Zukowski, you may begin your conference.

Russ Zukowski

Thank you operator and welcome everyone to the BlueLinx's first 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'd 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 risk 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'll 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 first quarter earnings conference call. Before we discuss the first quarter results, I'd like to take a moment to address my appointment in early March as the BlueLinx's Chairman and Interim Chief Executive Officer. As you know, Steve Macadam resigned his position as Chief Executive Officer March 10 of 2008. At the request of the Board of Directors, I'll serve as the Interim Chief Executive Officer until a permanent CEO is selected. A search committee composed of members of our Board of Directors is actively engaged in identifying a permanent replacement. We're fortunate to have strong executive and operational management team at BlueLinx whose focus remains on pursuing our strategic and operational initiatives.

This morning, I'll provide a brief overview of the quarter and then Doug will walk you through our financial results, followed by George who will review operations. I'll close our prepared remarks with an assessment of the current conditions and then open the call to your questions.

Market conditions have remained challenging and continue to deteriorate throughout our first quarter. Housing starts, which our business is closely tied to, are at historically low levels. Most forecasters continue to have a bearish outlook for the housing market for 2008 and continuing through 2009. Prices for the wood-based structural products also weakened slightly compared with the prices in the fourth quarter of 2007. Prices for some key grades remain at or below their estimated variable manufacturing costs. We're highly focused on managing cash flow. We're doing this by continuing to aggressively manage inventories, receivables, and spending and by keeping tight controls on our cost structure without diminishing our ability to achieve our business objectives. We remain committed to growing specialty products to more than 60% of total sales, to profitably manage our structural business, and to outgrow the market profitably over the long term. As we move forward, we will continue to adjust our business to this environment while at the same time ensuring that we continue to serve the needs of our customers, suppliers, and shareholders. I'm confident that we will emerge from this downturn well positioned to capitalize on our industry rebound when it occurs.

I'd now like to turn it over to Doug Goforth, our Chief Financial Officer, who will walk you through the financials.

Doug Goforth

Thank you, Howard. Good morning everyone. Starting on slide seven, overall sales for the first quarter ended March 29, totaled $717 million down 25% or $240 million from the first quarter 2007. Specialty sales declined 23% from the same period last year with the majority of the decline coming from decreased unit volume. Structural product sales declined 28%, also largely a result of lower unit volumes. Specialty products comprised 49% of total sales compared to 47% in 2007. BlueLinx generated approximately $78 million in gross profit for the quarter. Despite the deteriorating operating environment, we generated gross margins of 10.9%, slightly above the year-ago quarter. During the quarter, we remained focus on maintaining gross margins through our ongoing management of product pricing and to a lesser extent from channel mix.

Specialty gross margin of 14.2% compares with 13.9% a year ago. Structural gross margin of 8.6% is in line with 8.7% gross margin generated in the prior-year period. Operating expenses for the quarter totaled $85.6 million, a decrease of $8.3 million or 9% 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. However, fuel prices, which increased by approximately 40% over the prior period, had a negative impact on operating expenses. However, we have been managing our costs diligently and we are doing what we can to be more productive every day. The company's operating loss for the first quarter totaled $8 million compared with an operating profit of $10 million a year ago, reflecting the decline in gross profit that was partially offset by the $8.3 million improvement in operating expenses. We reported a first quarter loss of $10.6 million compared with year-ago net loss of $200,000. The net loss is after interest expense of $9.4 million which decreased by $1.3 million from the prior year and a tax benefit of $6.7 million compared with a benefit of $147,000 a year ago.

Turning to cash flow on slide eight, as you know our business is seasonal. First quarter working capital typically increases from the fourth quarter. During the quarter, receivables increased by $18 million in accordance with seasonal sales, and inventories increased $15 million as we took advantage of pricing opportunities to build stock in certain categories and support our specialty growth initiatives. These working capital increases were partially offset by a $9 million increase in accounts payable related to inventory investments. First quarter net cash used by operations of $21 million compares with the use of $77 million in the first quarter of 2007. Cash provided by financing activities was $23 million for the quarter, driven by a $26 million increase in outstanding borrowings under the revolving credit facility. The resulting cash balance at March 29 was $17 million compared with $20 million a year ago.

Moving to slide nine, we had $228 million available on our revolving credit facility as of quarter end. Our combined net debt balance on our mortgage and revolving credit facility was $504 million, down $107 million from a year ago. Now, let's look at inventory on Slide 10. Our first quarter inventory position of $350 million was up approximately 5% from fourth quarter but declined 25% from a year ago as we continued to balance inventory levels with the weakening demand environment.

Turning to slide 11, cash cycle days for the first quarter totaled 54. That compares with 56 days for the fourth quarter and 51 days for the same period a year ago. Accounts receivable days increased slightly compared to historical levels as a result of the current state of the industry. We continue to focus on actively managing our AR portfolio and our credit approvals to ensure we are selling to customers who have the ability to pay us in a timely fashion. Inventory days are higher than we would like and we will continue to actively manage inventory levels across the company.

In summary, we are highly focused on cash management through tightly managing inventory, accounts receivable, and operating expenses. We remain focused on gross margin and our flexible debt structure allows us to continue to pursue our business plan even through an extended downturn. Our debt structure consists of a 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 7, 2011 and our mortgage payments are interest only through July 2011. As noted earlier, we currently have availability in excess of $200 million on our facility.

Now, let me turn the call over to George Judd, our President and Chief Operating Officer.

George Judd

Thanks Doug. Our objective of growing specialty products into a larger portion of our total business remains consistent. We continue to grow and develop relationships with our customers and our vendors based on our value proposition of customer service, timely deliveries of the right products, and partnering with our suppliers and customers to find the best solutions to their supply chain challenges.

In support of our strategic objectives, we are pursuing the key initiatives highlighted on slide 14. First, we are focused on cash management. We're focused on having the correct amount of inventory in each market across the country. Our inventory is in excellent shape and we are turning it more efficiently. We are also diligently working our accounts receivables to manage our cash position and risk management during the downturn. And we are managing our operating expenses to balance with the current business environment. Second, we remain focused on improving gross margins by managing our structural products business, by increasing our mix of specialty products and by expanding our overall gross margins. Our results throughout the cyclical downturn demonstrate that we've performed well in sustaining gross margins in this very competitive environment.

Our third key initiative is to profitably grow our specialty products. We've made investments including a more sophisticated inventory management and demand forecasting tool and in a new order tracking and visibility system. These investments will allow us to reduce the relative amount of cash tied up in inventory, especially as we grow our specialty business. We also continue to expand our traditional customer base, emphasizing on industrials and related segments. Our fourth initiative involves expanding relationships with existing vendors and developing relationships with new vendors, whose business needs align well with our value proposition such as establishing premium brands and products. We offer premium roofing products through our relationship with Owens Corning. Our relationship with CCA continues to be a success for both BlueLinx and CCA in the flooring arena. And we are growing our relationship with CertainTeed on their maintenance-free exterior trim and siding products. We believe these initiatives will drive shareholder value over the long term.

This concludes my prepared remarks. Now, I'd like to turn the call back to Howard.

Howard Cohen

Thanks, George. Before turning the call over to the operator, I'd like to make a few closing remarks. We continue to operate in a challenging environment. Our primary focus is managing cash flow. We'll continue to aggressively manage working capital and spending to drive free cash flow in the business. We have and we will continue to take necessary steps in order to both focus on the business strategy while keeping tight controls on our cost structure. We have a flexible capital structure that provides us with liquidity necessary to continue to execute in an extended clinical downturn while positioning the company to be the supply chain solution of choice once this housing market has its correction. Most housing forecasts are still polling in the future to a strong, prolonged rebound of the housing market based on population, demographics, and other factors. We'll participate in that rebound as the leading building products distributor in the United States.

With that, I'd like to open it up for any questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Your first question comes from the line of Steve Chercover of D.A. Davidson.

Steve Chercover – D.A. Davidson & Co.

A couple questions. First of all, can you tell us why you didn't provide the volume numbers for your commodity products? Can we get them? It seems like the appendices have changed.

George Judd

The detail on the commodities, Steve?

Steve Chercover – D.A. Davidson & Co.

Yes.

George Judd

Yes we tried when we first came out and did our IPO, we tried to share everything so you get your models right. We think we've done that. We think you've done that and have accurate models and the information that we've provided now should allow you to move forward. We have the gross margin in there by channel and if there's anything else that you feel is lacking, then you can talk to us or Russ and we will try to share more information. But we are really trying not to share everything that we have because we think it's a competitive disadvantage.

Steve Chercover – D.A. Davidson & Co.

Okay. More is more where I come from and I think the volume data was helpful. But maybe staying along that line of thinking, OSB and lumber prices have been moving up in the month of April. Do you think it's sustainable and have you changed your policies towards maybe accumulating some inventory to take advantage of that? Or you are just going hand-to-mouth?

George Judd

Yes, now that's a good question. Prices have gone up. It did go down about 5% in Q1. They've made a rebound in the last couple of weeks. That's nice to see but it's not demand driven. It's capacity-constraint driven. And how long that lasts will remain up to how long the manufacturers exhibit production restraint. So, we certainly would like to see some higher prices. But we are not buying into any price rebound on commodity building blocks.

Steve Chercover – D.A. Davidson & Co.

So you certainly aren't speculating on that. Do you– is it your opinion that the pendulum might have swung too far in terms of the capacity rationalization or is this just a bit of seasonality coupled with I guess some very real but perhaps not excessive?

George Judd

Now I think you are right. I think it is a little seasonality. I think it's some discipline on production. I don't have any belief that it's over swing of the pendulum that production has been curtailed to the point that it's going to drive long-term higher prices.

Steve Chercover – D.A. Davidson & Co.

Okay, final question then I'll turn it over. Is BlueLinx still acquisitive if you can find the right specialty vendor or channel, would you be acquiring anything in this environment?

Howard Cohen

The answer on that question is yes, we are always looking for opportunities.

Steve Chercover – D.A. Davidson & Co.

Are the opportunities existent? Perhaps it's a better time than ever to be making deals.

Howard Cohen

We're always evaluating opportunities and when appropriate and at the right economic model, we will take advantage of it.

Steve Chercover – D.A. Davidson & Co.

Thank you.

Operator

Your next question comes from the line of Keith Hughes of SunTrust.

Keith Hughes – SunTrust Robinson Humphrey

Really two questions. Number one, do you have any kind of framework or timeline you can tell us on the search for CEO and when we will see an announcement?

Howard Cohen

We have retained one of the leading search firms. I'm actively involved in that process with them as well as some of the board members are. We're trying to move as quickly as possible but at the same time have a thorough search throughout both the current community that we may serve as well as outside of our environment. I'd anticipate that we may be able to conclude the search within the next four to six months.

Keith Hughes – SunTrust Robinson Humphrey

Okay. Are the current candidates you are looking at primarily from what you would consider competitors or are you looking outside of the lumber, building materials, distribution industry?

Howard Cohen

We're looking for solid experienced sitting CEOs that can provide long-term both strategic vision and value to the company.

Keith Hughes – SunTrust Robinson Humphrey

Okay. Final question I guess more for George, the results at specialty and in terms of unit declines and fairly similar in most periods to structural. Now, you've signed up a lot of the manufacturers over the last couple of years to a variety of products. Is there an opportunity this year for those numbers to at least go down less than what we see in structural?

George Judd

Yes Keith. That's our plan and every quarter I think the shift has increased from our mix from total revenue and certainly on the gross margin side from structural to specialty. And the margin is also affected by the deepness and how deep we are in the specialty SKUs. So our margin continues to do well. But we are very disciplined and as I've committed on previous calls, we are very disciplined that we are going to get paid for the service that we have. We're passing on business that's less profitable. We are passing on business that's higher risk as far as receivables go in this current market. So, we are not going to buy share at the risk of margin or at the risk of increased credit risk.

Keith Hughes – SunTrust Robinson Humphrey

Okay. Final question, the shift to specialty, is the Board looking for a CEO candidate that will continue and enhance that strategy or could there be a new strategy with the new person brought in?

Howard Cohen

The board is very comfortable with the current strategy which is to enhance our percentage of specialty products as we go forward. Certainly, any new individual that comes in with an open mind and new vision we will consider. But, at this point in time, we are very comfortable with the current strategy.

Keith Hughes – SunTrust Robinson Humphrey

All right. Thank you.

Operator

(Operator instructions) Your next question comes from the line of Bob Trout of Goldman Sachs.

Bob Trout – Goldman Sachs

Hey good morning guys. A question for you on the margin. I think particularly on the specialty side, this was the highest margin if my model is correct we've seen since like the second-quarter '06. I'm just wondering is that purely a function of the SKU rationalization last quarter?

George Judd

No, it's a combination of things Bob. Certainly, SKU rationalization helped. There's also a very strong commitment of our organization to be disciplined in our pricing. There's a very strong commitment to make sure that we are getting paid for the smaller orders. One of the larger drivers of our gross margin in this environment is that our average order size has fallen. So if our average order size falls, we have to make sure that there's enough gross margin dollars to cover that transaction. That takes discipline and measurement and we are focused on that.

Bob Trout – Goldman Sachs

Okay. I guess kind of as a follow-up on your commentary on receivables, are you seeing any sort of meaningful pickup in bad debt or aging accounts or anything?

Doug Goforth

Bob, this is Doug. We have since the fourth quarter – we have seen an extension of the days to pay that's worsened a bit since the fourth quarter. We have had certain customers starting in the fourth quarter who have gone out of business. So our reserve has gone up compared to prior periods. But we are managing it tightly.

Bob Trout – Goldman Sachs

Okay, okay thanks a lot guys.

George Judd

Thank you.

Operator

Ladies and gentlemen, that's all the time we have for questions today. Gentlemen, are there any closing remarks?

Howard Cohen

I'd like to thank everyone for being on the call today and we look forward to talking to you next quarter.

Operator

This does conclude today's conference call. You may now disconnect.

Howard Cohen

Thank you.

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