Nov 3, 2011
Executives
Maryon Davis – Director, Finance and IR George Judd – President and CEO Doug Goforth – CFO
Analysts
Alan Weber – Robotti & Company Steve Chercover – D. A.
Davidson
Operator
Good morning. My name is Nicole and I’ll be your conference operator today.
At this time, I would like to welcome everyone to the BlueLinx Third Quarter Earnings 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, Thursday, November 3, 2011.
Thank you. I would now like to turn the conference over to Maryon Davis with BlueLinx.
Ma’am, you may begin your conference.
Maryon Davis
Thank you, Nicole and welcome everyone to the BlueLinx Third Quarter 2011 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 website 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 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 Chief Financial Officer, Doug Goforth.
Doug Goforth
Good morning, everyone and thank you, for joining us today. I’ll start with an overview of the quarterly results and George will provide an operations review of the quarter and close with the final perspective.
BlueLinx’s financial performance for the third quarter of 2011 improved compared to a year-ago as we continue to make strides growing our specialty products business and as we continue to effectively manage our structural products business. Today, we reported a GAAP net loss of $6.2 million or $0.12 per diluted share on revenue of $472.9 million.
That compares to a GAAP net loss of $14.9 million or $0.48 per diluted share on revenue of $464.7 million in the third quarter of last year. Now, let’s review the results in more detail.
For those of you following along with the slides posted on the Investors Relation section of the BlueLinx’s website, I will begin with slide five. Overall sales for the third quarter ended October 1, totaled $472.9 million, up 1.8% or approximately $8 million from the third quarter of 2010.
Specialty sales increased 12.4% year-over-year, reflecting an 11.4% increase in unit volume and a slight increase in product selling prices. Structural product sales decreased 12.4% from the same period last year.
This decrease was driven by a 14% decrease in volume and a 1.6% year-over-year increase in product selling prices, as prices for wood-based structural products stabilized during the quarter compared to the volatility experienced in the year-ago period. Specialty products comprised 61% of total sales, up from 55% in the third quarter of 2010, as we continue to focus on higher margin products and services.
Overall, unit volume rose 0.1% compared to the year-ago period. The housing market and overall economy remain very challenging.
For the current quarter, actual U.S. single family housing starts were down 1.4%, as compared to the third quarter of 2010.
Actual total U.S. housing starts increased 6.2% for the third quarter of 2011, compared to the same period last year.
With BlueLinx’s end use markets more closely tied to single family housing, we believe the increase in revenue for the quarter driven by our specialty products growth represents improved operating performance and expanded specialty market share. BlueLinx generated approximately $58 million in gross profit for the quarter, which is an $8.3 million increase over the same period last year.
Overall, gross margin was 12.3% for the quarter, up from last year’s 10.7%, as a result of initiatives to increase margins across all product categories, combined with increases in underlying product prices. Both structural and specialty margins rose during the quarter, compared to the year-ago period.
Structural margins of 10% were up 2.6% compared to the prior year quarter; reflecting pricing discipline and more stable pricing environment compared to the third quarter of 2010. Average third quarter 2011 benchmark wood-based structural prices were up approximately 2.2% compared to the third quarter of 2010.
Specialty gross margin for the quarter was 15.1% compared with 14.4% a year-ago, the result of robust unit volume growth and slightly higher product selling prices. Third quarter operating expenses of $57.1 million were flat compared to the same period a year ago and included $2.1 million and $1.9 million in net gains from significant special items respectively.
Our third quarter reported operating expense included the following significant special items; an insurance gain of $1.2 million on the loss of Newtown, Connecticut real property improvements. During the heavy snow storms in February in the Northeast, our Newtown, Connecticut facility suffered a series of structural collapses, leaving the facility severely impaired and ultimately damaged beyond repair.
Since this time, we have been successfully servicing the Newtown market from our neighboring full service facility in Bellingham, Massachusetts and Denville, New Jersey, a gain of $2 million from the modification of the Company’s corporate headquarters lease agreement. On September 30, 2011, the company entered into an amendment to its lease agreement for its corporate headquarters building.
Under terms of the amendment, the company was released from its obligations with respect to building vacated in late 2007, when the Company consolidated its leased Atlanta headquarters and sales centers into one building from two buildings. Severance charges of $1.1 million.
We recorded $1.1 million in severance charges for headcount reductions completed during the quarter, to further reduce costs and realigned our operation. We estimate the annualized savings resulting from this realignment to be in excess of $5 million.
The company reported an operating profit for the third quarter of $1.2 million, compared to an operating loss $7.3 million in the prior year period, reflecting an $8.3 million increase in gross profit. EBITDA of $3.4 million increased $7.8 million over the prior year period, driven by the improvement in gross profit.
Our third quarter net loss of $6.2 million or $0.12 per diluted share compares with a net loss of $14.9 million or $0.48 per diluted share in the third quarter of 2010. Our reported net loss for the period is after interest expense of $7 million compared to interest expense of $8.1 million in the prior year period, which included $1.2 million in pre-tax non-cash interest income associated with our interest rate swap.
The current year net loss is after a tax provision of $94,000 compared to a tax benefit of $778,000; which included a tax refund of approximately $660,000 related to our 2009 amended return in the prior year period. Looking at year-to-date result on slide six; sales for the nine months ended October 1 totaled $1.36 billion, down 5% from the same period last year.
Gross margin of 11.9% increased from 11.6% in the year-ago period. Year-to-date reported operating expenses, which included $8.8 million in net gains on significant special items decreased 5.7% from the same period last year, which included $1.9 million in net gains on significant special items.
The resulting operating loss of $5.7 million was largely driven by the housing-related drop in demand. EBITDA increased $3.8 million over the prior year period due to a decrease in gross profit, offset by net gains on significant special items.
The year-to-date reported net loss of $28.3 million or $0.75 a share compares with a net loss of $33 million or $1.08 a year-ago. Turning to cash flow on slide seven, during the quarter receivables decreased by of $21 million in accordance with the seasonal slowdown and inventories decreased $8.9 million.
These decreases were partially offset by $5.9 million decrease in accounts payable. Third quarter net cash provided by operations was $17.5 million.
This compares with net cash used in operations of $33 million in the third quarter of 2010. Cash generated during the third quarter of 2011 was limited, because working capital needs largely from the specialty product business increased late in the quarter as demand continued to grow versus last year.
Cash provided by investing activities was $0.5 million from the investment and property, plant, and equipment. Cash used by financing activities was $17.2 million for the quarter as discussed on last quarter’s call to previously announced $60 million rights offering closed during the third quarter.
On July 29, 2011, we issued approximately 28.6 million shares and received $60 million in gross proceeds from the rights offering. $56 million of the proceeds from the rights offering were used to immediately pay down the revolving credit facility.
In conjunction with the rights offering, we negotiated an amendment to our mortgage agreement, which in part allowed for the release of $38.3 million in total funds held as collateral under the mortgage agreement, saving $2.4 million a year in interest expense. The released cash was used for an immediate prepayment on the mortgage loan without incurring a prepayment penalty.
Also in conjunction with the rights offering, we negotiated an amendment to our revolving credit facility, which became effective on July 29, 2011 and further improved our borrowing capacity. The resulting cash balance at October 1 was $5.9 million, compared with $12.9 million a year-ago.
Moving to slide eight; we had approximately $151 million of excess availability under our revolving credit facilities as of quarter-end. The combined debt balance on our mortgage and revolving credit agreements was approximately $365.4 million, a decrease of approximately $109 million from second quarter of 2011.
Net debt at the end of the third quarter was approximately $357 million, compared to $430 million at July 2 and was up approximately $10 million from a year-ago. Turning to slide nine, cash cycle days for the third quarter totaled 58.
That compares with 58 days for the second quarter of 2011 and 51 days compared to the same period a year-ago. The increase in cash cycle days from a year-ago was driven by higher levels of specialty product inventory as demand continued to grow versus last year.
We continue to balance the inventory levels with demand environment, while also continuing to support strategic products and vendors as part of our constant focus on specialty product growth. That concludes my prepared remarks.
Now, let me turn the call over to George.
George Judd
Thank you, Doug and good morning. Recently I attended to National Housing Industry meetings, where housing forecasters, economists and business leaders discussed their views and projections for our industry.
I would characterize the consensus of the housing forecasters attending, the meeting is being optimistic for the balance of the year and next year. The consensus of the business leaders was less optimistic.
The most recently issued housing data from the U.S. Commerce Department indicates that in September, builders had begun work on a seasonally adjusted 658,000 homes, that’s 15% increase from August and the best pace since April 2010, when the federal home buyers’ tax credit temporarily boosted construction.
Still the level is roughly half of the 1.2 million starts that economists say is consistent with a healthy housing market. The challenges continue for our industry and for BlueLinx, however the numbers are showing modest improvement as the housing recovery begins.
BlueLinx’s operational performance during the third quarter while impacted by the continued difficult conditions of the housing and construction markets showed we are benefiting from our value-added strategies. As we continued to take share with specialty products and continue to manage our structural business for possibility, our results improved.
We narrowed our comparable third quarter adjusted net loss by approximately $5.4 million, relative to year-ago. In our specialty business, we saw our unit volume growth and gross margin expansion led by the product lines where we have strategic growth initiatives.
Examples of these products were focused on include high touch steel intensive products like metals, exterior siding and trims and specialty lumber, which on a year-over-year basis grew by over 20%. Total specialty revenue grew 12.4%, expanding across all distribution channels, with both reload and direct channel business showing strong growth.
Gross profit increased $6.9 million or 18.2% on margins of 15.1%. Specialty sales as a percent of total revenue, reached 61% in the third quarter, surpassing our long-term goal of 60% again this quarter, up from 55% a year-ago.
In keeping with our focus on specialty products we announced today, our plans to launch a complete line of privately branded engineered lumber products, which we anticipate will be available beginning in February 13, 2012. In our structural business, unit volume declined 14% due to the demand slow down and due to our pricing strategies, which are based on making good decisions balancing volume with overall profitability and our ability to serve our customers in this very difficult environment.
We reduced contracts to purchase the commodity portion of the structural SKUs during the quarter and focused on value-added products within our structural family of products. Our focus on value-added products along with improved underlying product pricing relative to the year-ago quarter, resulted in gross margins of 10% for the quarter compared with – compared to 7.4% in the year-ago quarter.
We grew gross margin dollars generated approximately 17% or $2.7 million on 12% or $26.5 million less revenue. Subsequent to the quarter-end after an extensive evaluation, we made a decision to consolidate the Seattle, Washington facility into the Portland, Oregon facility and our Sacramento, California facility into the Fremont, California facility.
We remain very committed to the Seattle and Sacramento markets and our loyal customers. We expect to continue to deliver same high level of service that our customers count on from BlueLinx from these consolidated neighboring full service facilities.
We’ll continue to look at all markets and businesses within BlueLinx and we’ll make the necessary changes in investments to improve our results. We believe our approach is the right one and our third quarter performance demonstrates the positive impact of our operating strategies and initiatives.
We’re making prudent and appropriate decisions every day to strengthen our long-term value proposition with customers and vendors. We continue to seize opportunities for profitable growth by focusing on growing our specialty business, enhancing our customer service and maximizing the efficiency of our operations.
With that, I will open the call to questions. Operator, will you please instruct everyone in how to ask questions.
Thank you.
Operator
(Operator Instructions) Your first question comes from the line of (Alan Weber) with Robotti & Company.
Alan Weber – Robotti & Company
Good morning. The first question I had was Doug, I missed part of it – when you were talking about the SG&A in the third quarter, was it $8 million of unusual items?
Doug Goforth
No. Not in the third quarter, that was for the entire year, year-to-date.
Alan Weber – Robotti & Company
Okay and what about in the third quarter?
Doug Goforth
No. That was year-to-date numbers.
The third quarter numbers are the one that I specifically talked about and they’re also contained in our press release.
Alan Weber – Robotti & Company
Okay, that’s $2.1 million?
Doug Goforth
The net.
Alan Weber – Robotti & Company
Right.
Doug Goforth
Net is $2.1 million for those three items, yes.
Alan Weber – Robotti & Company
Okay. Okay and then, the other thing, you made a comment about what used to have restricted cash on the balance sheet.
Has that balance sheet item kind of gone away and you used the cash to pay down part of your mortgage, is that what took place?
Doug Goforth
There was another noncurrent asset. That was escrow money from our mortgage cash trap.
So, yes that money has gone away, we used it to pay down the mortgage.
Alan Weber – Robotti & Company
Okay and then I guess for the quarter – so for the quarter if you’d take out the onetime gains, you were basically breakeven at the operating level, right? Maybe a slight loss I guess?
Doug Goforth
Slight.
Alan Weber – Robotti & Company
A slight loss in the quarter, I just wanted to know what does it take for you to become – for you to really become profitable or your EBITDA to exceed your interest and CapEx. Can you do that at the current level of revenue and when you talked about consolidating some facilities I guess after the quarter, what that will mean financially?
Doug Goforth
Well, we’ve talked about a number of times on record what we believe the total housing starts need to be to return the company to profitability on a net income basis and that’s somewhere approaching approximately 900,000 starts. With the costs that we’ve taken out, it’s probably a little lower than that now.
George Judd
And I would also say, Doug and I talk about this quite a bit, all these numbers change, right? So as we continue to grow our specialty business, if we manage our structural business the way we did in the third quarter, which was managing it for profitability, which we’ve been talking about for a long time and I think you can see that in our numbers, 10% gross margin on our structural business in the quarter and growing our specialty business 15.1% margins at 61% of total revenues as those numbers can continue to expand and those become – those specialty and higher margin structural business continue to grow as a percent of our total revenue.
All of those numbers change for housing and that’s been an evolution through this recession that we’ve been in. So the numbers change every year.
Yes, as we consolidate a couple of facilities, we’ll take out some expenses. We add some expenses because we got to drive it little further but, net-net we will take out some expenses.
As we continue to grow our focus product codes as a percentage of total revenue, it dilutes the need for 900,000 starts. So that number is always falling and it’s been falling for the last four years.
So it’s a moving target and I think that this quarter, we were close to having an operating profit and we took some cost out since then. So, we’re getting real close.
Alan Weber – Robotti & Company
And which is excellent. And the facilities that you closed, did you own any of those facilities?
George Judd
Yes. We owned them all, we owned both of them.
Alan Weber – Robotti & Company
You owned both of those and what do you hope to get in terms of proceeds when you sell them?
George Judd
Well.
Doug Goforth
A lot.
George Judd
We’ll sell them and we are actively doing that and we’ll pay off our mortgage and have some cash. But we don’t know what that will be until it’s negotiated.
We’re – hopefully we’ll have some things to share in next quarter or the following quarters.
Doug Goforth
Just to elaborate that, one of the facilities – the Sacramento facility is not part of our mortgage. So whatever proceeds we get from the sale of that property, will all be cash.
On the Seattle property, we fully expect to – it’s been our history on all of our other real estate transactions to sell that for in excess or at least break even on whatever the mortgage allocation is.
Alan Weber – Robotti & Company
Okay, my last question now is, when you talk about the private branded lumber, what’s the financial impact of that going forward?
George Judd
Well, it’s private branded engineered lumber, right? So it’s not commodity lumber, that’s a specialty product and we’ve been working for years.
Engineered lumber historically has been one of our most profitable product codes, in the last couple of years, it’s fallen off. And so, we had to make some changes to return to profitability to that.
So that’s what we’re working on. So we might have a more national product offering.
It’s our brand, we can have it manufactured closer to the markets. So not just tied to one manufacturer and provide our engineered lumber.
Engineered lumber is a much more a technical sale than many of the products that BlueLinx sells. So we have a lot of technical resources assigned to sell that product and we’ll be able to take that technical excellence across the country.
And long-term, it’s a growth strategy, short-term it’s a disruption of the brand and our customers have been buying from us.
Alan Weber – Robotti & Company
Okay, great. Thank you, very much.
George Judd
Thank you, Alan.
Operator
Your next question comes from the line of Steve Chercover with D. A.
Davidson.
Steve Chercover – D. A. Davidson
Good morning.
George Judd
Good morning, Steve.
Steve Chercover – D. A. Davidson
Just a couple of questions, please. First of all, now that specialty volume exceeds your 60% target, are you going to ratchet that target higher or are you comfortable with the mix?
George Judd
No, we’re going to continue to expand it. And we haven’t – this is two quarters in a row that we beat our 60% goal.
We’re setting more product specific targets for the business, we haven’t communicated a 65% goal or anything out there to the markets yet, but when we think it’s appropriate we will.
Steve Chercover – D. A. Davidson
But I mean – and I’m not trying to put numbers in your – for you to achieve but if it happened to be 75% of your mix, you’d be fine with that as long as it’s profitable?
George Judd
Well, yes, I mean we’d like to – we add more value on the specialty side of products. However, part of the reason we’re at 61% is, because we’ve shrunk some of our structural businesses more than we had planned.
So, we expect to grow our specialty or our structural business on the value-added product side. And that’s really what we did successfully in the third quarter, we’re able to sell some structural products that gave us the opportunity to make acceptable margins.
And I fully expect to continue to do that in the future and that’s why I’m reluctant to say that it’s 75% of something. Because listen, there is good value products that we classify on our structural product side that our customers need to buy and that we can successfully buy and sell and make acceptable margins and we need to get some of that business back.
Steve Chercover – D. A. Davidson
Sure, can you elaborate on why you enjoyed a late quarter surge for specialty products?
George Judd
Well, it accelerated really through the year. So it’s been continued growth, it did grow – the end of the quarter was better, housing starts came out a little stronger than most people forecast.
658,000 was above where we thought they’d be and we are seeing some follow through on that business. So it’s just – it’s again, the continued rebound of the housing industry and the share growth that we’ve been successful of obtaining in the last few years.
Steve Chercover – D. A. Davidson
Okay and can you name names of who is going to be supplying the new private label engineered lumber?
Doug Goforth
Not yet?
George Judd
We’ve got most of it worked out but we’re – we’ll have a more detailed announcement forthcoming.
Steve Chercover – D. A. Davidson
Okay. So the reason you’re classifying it as specialty is because it’s not plain old commodity, so is it LVL or I-beams, what kind of products are they?
George Judd
Yeah, it’s LVL and I-beams and glue lams and we’ve always classified it as specialty. It’s been that way since our inception.
So there is no change there. We haven’t moved any – since our inception, we haven’t moved any classification of revenue from structural to specialty or vice versa and that’s not what this is either.
We’ve always classified engineered lumber as a value-added specialty product.
Steve Chercover – D. A. Davidson
Okay. And a quick one for Doug if I could.
The diluted weighted-average shares at quarter-end, is that the number we should use going forward, because I assume that the average number of shares in the quarter was somewhat different?
Doug Goforth
If the transaction had closed at the beginning of the quarter, Steve, it would have been 59.3 million shares, versus 51.2 million.
Steve Chercover – D. A. Davidson
59.3 million?
Doug Goforth
Yes.
Steve Chercover – D. A. Davidson
Okay, so, that’s what we use going forward.
Doug Goforth
Yes.
Steve Chercover – D. A. Davidson
Okay. Thanks for that.
That’s good. Thank you.
George Judd
Thank you, Steve.
Operator
There are no further questions at this time. Mr.
Judd, are there any closing comments?
George Judd
Yeah, thank you. In closing, I’d like again thank our stockholders for their continued support and thank our employees for working safely and effectively in a very, very difficult market.
Thank you for attending and we’ll talk to you again next quarter.
Operator
Thank you, for participating in today’s conference call. You may now disconnect.