Oct 30, 2013
Executives
Maryon Davis - Director Finance & IR Howard Cohen - Executive Chairman Doug Goforth - CFO
Analysts
David Williams - Williams Financial Mark Kaufman - Little Oak Asset Alan Weber - Robotti & Company
Operator
Good morning. My name is Tony and I will be your conference operator today.
At this time, I would like to welcome everyone to the BlueLinx’s Third Quarter 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, October 30, 2013. Thank you.
I would now like to introduce Maryon Davis with BlueLinx. Ms.
Davis, you may begin.
Maryon Davis
Thank you, Tony. Good morning.
Thank you for joining us for the BlueLinx Third Quarter 2013 Earnings Conference Call. This call is being webcast on the company’s website at bluelinxco.com.
The earnings release and presentation slides for this call can be found in the Investor Relations section of the company’s website. This presentation includes statements about our expectation of future operational and financial performance that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements are subject to a number of risks, uncertainties and assumption that could cause our actual results to differ materially from those provided including but not limited to risks and uncertainties with respect to economic, governmental and technological factors outside of our control, and changes into supply and/or demand for products we distribute particularly as a result of conditions in the residential housing market. These and other factors that could cause actual results to differ materially from forward-looking statements are discussed in greater detail in our filings with the Securities and Exchange Commission.
Forward-looking statements speak only as of the date of this presentation. We undertake no obligation to revise them in light of new information.
Finally, we undertake no obligation to review or confirm analyst’s expectations or estimates that might be derived from this presentation. This presentation includes references to EBITDA which is a non-GAAP financial measure within the meaning of the Securities and Exchange Commission’s Regulation G.
Reconciliations of net income to EBITDA and segment income to segment EBITDA are included as an appendix and are posted on our website at bluelinxco.com. Our speakers this morning are Howard Cohen, Executive Chairman; and Doug Goforth, Chief Financial Officer.
Doug will begin the call this morning with a review of the financial statements, then Howard will comment on the current results and add a final perspective before opening the call to your questions. Now let me turn the call over to our Chief Financial Officer, Doug Goforth.
Doug Goforth
Thanks, Maryon. Good morning, everyone, and thank you for joining us today.
This morning we reported a net loss of $3.2 million or $0.04 per diluted share for the fiscal third quarter of 2013 compared with a net profit of $3.1 million or $0.05 per diluted share for the fiscal third quarter of 2012. As noted in our press release this morning, our third quarter results were impacted by the following previously announced items.
A pre-tax restructuring charge of $2.8 million or $0.03 per diluted share primarily related to the closure of five distribution centers and a pre-tax gain of $3.7 million or $0.04 per diluted share related to the sale of the company’s office building located in Denver, Colorado. Beginning on Slide 5, overall sales for the third quarter ended September 28 totaled $558 million, up 12.3% or $61.1 million from the third quarter of 2012.
Specialty sales increased 11% year-over-year reflecting a 10.2% increase in unit volume and a slight increase in product selling prices. Specialty products comprised 57% of total sales, up from 55% in the second quarter of 2013, as we continue to focus on higher margin products and services and down from 58% from the same period last year.
Structural product sales increased 15% from the same period last year. This increase was driven by a 14.2% increase in volume and 0.9% year-over-year increase in product selling prices as prices for wood based structural products stabilized during the quarter.
Overall, unit volume increased 11.9% compared to the year ago period. Gross profit for the third quarter totaled $62.5 million, up 3.2% from $60.5 million in the year ago period.
Gross margins were 11.2% compared to 12.2% a year ago. Overall gross margins were impacted by a higher mix of lower margin structural sales, lower margin sales related to the closure of five distribution centers in a highly competitive pricing environment.
Third quarter operating expenses of $59.4 million increased $9.1 million compared to the same period a year ago. Operating expenses included $0.9 million in net gains from significant special items as previously discussed, compared to $9.2 million gain from the sale of certain properties in the prior year period.
Excluding the impact of the significant special item, operating expense as a percentage of sales improved 10.8% compared to 12% a year ago even as unit volume through the warehouse channel increased 11.6% compared to the year ago period. Reported operating profit for the quarter was $3.1 million compared to an operating profit of $10.3 million a year ago and reflects the increase in gross margin and the significant special items previously discussed.
The third quarter net loss of $3.2 million or $0.04 per diluted share compares with the net profit of $3.1 million or $0.05 per diluted share in the third quarter of 2012. Our reported net loss for the period is after interest expense of $6.9 million compared to $7.3 million in the prior year period.
The current quarter net loss is after a tax benefit of approximately $600,000 and compares to a tax benefit of approximately $100,000 in the prior year period. After adjusting for previously discussed significant special items in the third quarters of 2013 and 2012, adjusted net loss for the quarter ending September 28, 2013 was approximately $2.2 million or $0.03 per adjusted diluted share compared to an adjusted net loss of $3.7 million or $0.06 per adjusted diluted share in the year ago period.
The company’s operating results for the 2013 and 2012 third quarter and year-to-date period adjusted for significant special items are shown on Slide 6 in the presentation accompanying this conference call and in the company’s press release issued this morning. A complete reconciliation of GAAP net loss to adjusted net loss is included in both the appendix of the conference call presentation and the press release supporting tables.
Turning to cash flow on Slide 7, during the quarter BlueLinx generated approximately $63 million in cash from operating activity, up from approximately $23 million for the same period last year. Moving to Slide 8, we had approximately $93 million of excess availability under our revolving credit facility as of quarter end.
That is approximately $51 million above our minimum availability requirement on our U.S. revolving credit facility as of September 28.
The combined debt balance on our mortgage and revolving credit agreements was $437.9 million, a decrease of $63.9 million from the second quarter of 2013. Net debt at the end of the third quarter was approximately $422 million compared to approximately $387 million at September 29, 2012 and $491 million at June 29, 2013.
Consistent with prior years' excess availability always tightens through year end, but we believe that the amounts available from our revolving credit facilities and other sources will be sufficient to fund our operations and capital requirements for the next 12 months. As previously discussed, during the third quarter of 2013 the company sold its office building in Denver, Colorado.
The cash received from this sale was reflected in the mortgage cash (inaudible) at September 28th 2013. On October 1, 2013, $8.4 million of cash was used to pay down the mortgage principal.
Turning to Slide 9, cash cycle days for the third quarter totaled 61. That compares to 63 days sequentially and 59 days for the same period a year ago.
The sequential decrease in cash cycle days is partly result of efforts to rationalize our inventory to ensure an appropriate return on investment. We continue to balance inventory levels with the demand environment while also continuing to support strategic products and vendors as part of our ongoing focus on specialty product growth.
That concludes my prepared remarks. Now let me turn the call over to Howard.
Howard Cohen
Thank you, Doug. I will begin my remarks with a brief report on the progress made and the path to profitability roadmap outlined during the company’s second quarter conference call.
Slide 11 provides a complete overview of the roadmap along with an update on each component of the company’s plan to create sustainable and profitable growth for BlueLinx. I will highlight several key items impacting the third quarter results.
The implementation of the restructuring program is proceeding as planned in sales and operational initiatives are having a positive impact on the company’s financial performance. Despite the restructuring this quarter the company achieved significant improvement in same-center results.
Specifically, we have gained sales growth momentum and higher margin specialty products. The renewed focus on specialty product growth resulted in an increase in revenue of approximately $32 million or 11% over the same period last year as unit volume increased 10.2%.
This unit volume increase is the strongest specialty unit volume growth since the first quarter of 2012 which was favorably impacted by mild weather. We are encouraged by the unit growth we are able to achieve in the quarter.
Same-center specialty product growth grew 11.7% from a year ago. The mix of specialty products also improved for the third quarter rising to 57% of total revenues from 55% in the second quarter of 2013.
On an overall basis, commodity pricing has stabilized and margins are recovering. Overall gross margin increased approximately $2 million over the same period last year.
As Doug discussed, gross margin percentage was pressure during the quarter by several factors including the wind down of the five distribution centers that were closed in September. However, on a same-center basis, our margin percentage improved through out the quarter and continues to improve in October.
And third quarter results benefited from operating leverage as a result of changes made to reduce the company’s cost structure and simplify the organization structure. As previously announced, during the quarter we closed five under performing distribution centers.
Turning to Slide 12. On the same-center basis, sales increased 14.2% for the third quarter compared to the same period a year ago.
Adjusted EBITDA increased 118% to $6.1 million from $2.8 million for the same period a year ago. The increase in adjusted EBITDA reflects an increase in unit volume of 11.9% and the company’s continued focus in operating efficiencies and leveraging fixed cost as unit volume increased.
We have launched other initiatives this quarter that we believe will add significantly to the company’s financial performance. We are pursuing multiple avenues for growth in addition to accelerated specialty product growth including an emphasis on faster growing markets and expanding into adjacent markets like multifamily.
Finally, I’d like to take a minute to discuss our search for the permanent CEO. During the last five months the search committee has met with an exceptional group of candidates that we believe are capable or rapidly taking the company to the next level.
While we are not ready to make an announcement, I expect the new CEO to be in place January 1. Since this may be a last chance for me to publicly address this audience, I want to thank everyone in BlueLinx for the support they've provided me over the past several months.
While there remains much to accomplish I feel fortunate that we have such a dedicated team eager to support the permanent CEO. And with that, I’ll open it up for questions.
Operator?
Operator
Okay. (Operator Instructions).
Your first question comes from the line of David Williams with Williams Financial.
David Williams - Williams Financial
It looks like you guys are making some good progress on really moving up that mix of specialty products in the overall revenue base, from 57%, to 55% was a nice move. Can you talk a little bit about may be the strategy on driving that specialty, and then maybe how your -- what that margin differential is and where you expect that to go may be over the next nine to 12 months?
Howard Cohen
Well, this is Howard. We obviously lost some focus in the second quarter as it relates to commodities.
I think more than anything else it was management direction to bring both our inside and outside sales force much more inline in the focus with what really our long term as well our short term objectives are which is to move specialty which have higher margins and can differentiate us from our competition. As it relates to the margins, there were still some margin compression in the last quarter as we did some skew rationalization to take out some of the product lines that really weren’t moving and to get our inventory better under control.
So even though our margins did improve in the last quarter, you’ll see improved margin performance going forward as we have washed through some of that inventory that I just talked about. Basically, we’re looking to see margins significantly in the, call it the 15%, 16% level coming out of warehouse and blended margins in specialty products to be around 14% or so.
So we’re going to move in that direction and we think that we certainly could do that in the near future.
David Williams - Williams Financial
And if you could just kind of characterize how you feel today I guess on the progress that you’ve made. You’ve obviously made some changes here it looks like its impacting the bottom line but how are you feeling about it, are things moving maybe in the direction you expected or may be ahead of where you thought maybe the schedule would be, if you could just kind of give us a little color around that restructuring?
Howard Cohen
Well, no, I don’t think we’re ahead, I think we’re right where we would like to be. I’ve been very careful not to what I would call box the new CEO into a corner as it relates to strategic planning long term as he looks at the company and tries to bring in maybe a new vision for us.
So I think I’ve done much more what I would call blocking and tackling the restructuring as getting spend to control appropriately placed within the company providing more direction to the markets that we serve where we have a strategic advantage, where we have critical mass, where we are upgrading the management teams in some of the more important locations so that we can implement better our strategies. We’ve taken out basically a layer in many areas of management but we’ve actually reinvested some of those towers in more people on the street either inside or outside.
So I'm pleased with where we are restructuring-wise. I think that there will be some additional changes when the new CEO comes as he as some fresh eyes and looks at the business.
But certainly we’re back on a path that will allow the company to have positive EBITDA both short and long term. And I'm pleased with the response that the company has had to the changes that we’ve made.
I hope that answers your question, David, but please if there is additional ones please ask him.
David Williams - Williams Financial
Perfect, okay, it certainly does and thank you for that color there. And I guess next, if you don’t mind, I wanted to see what your thoughts were as far as the demand that you are seeing today.
You guys are early in the supply chain but thinking about what some of the distributors some of your customers have said lately and thinking about where the home builders are as far as new order growth seems to be slowing a bit, what is your real outlook and are you seeing anything or are you maybe seeing less orders coming from your customers today from where we were earlier on outside of normal seasonality? Are you seeing anything today that gives you any concern about maybe where the market is today?
Howard Cohen
Well, I think first of all, I certainly wouldn’t consider myself an expert in this industry, but I will say this. I think many people need to really understand the markets that this company serves and what really the profile is of who we serve.
About 50% of our business is to single family, in the single family area through basically distribution to through two step. But a good percentage of our business is also through home and remodeling and that area grows at a much lesser rate more than the 7% to 8% to 9% range.
When you look at our performance in the last quarter and you see what our specialty growth was I think it speaks very well that we’re holding our own and actually potentially growing in market share in that particular area. When you look at the mix of both the single family and again the markets that we serve because again we’re not in Phoenix, we’re not in some of the other areas where a lot of the growth is still maintaining itself and it basically goes direct or through well one step.
So we have not seen a slow down in performance I think in specialty sales, especially specialty sales. I think what you’ve seen is that we’re capturing our fair share and maybe a little bit more.
I don’t think the market is growing as fast as some of the prognosticators mentioned at the beginning of the year. But I think the market is growing somewhere between 15% and 20% this year and we’ve got some tailwinds for us for going into the next couple of years.
So I'm optimistic but I'm not -- I don’t think that we’re seeing the 25% or 30% forecast as sometimes people put in the newspapers.
David Williams - Williams Financial
Sure I understand. Well thanks so much.
I appreciate your time and good luck on the next quarter.
Howard Cohen
Thank you. Hopefully there will be someone else -- I know someone else would be talking next time.
Operator
Your next question comes from the like of Mark Kaufman with Little Oak Asset.
Mark Kaufman - Little Oak Asset
Just wondered if you could comment on the status of the closed distribution centers? I know you’re contemplating selling them.
Doug Goforth
Well, this is Doug. The facilities they’re all as for operations are closed.
Three of them were leased facilities, so we’re completely out of there and we’re in the process of working on some sublet deals for those. The two properties that we own, one of those is under contract and we expect that to close probably in November and the other property is actively being market and there is a lot of interest in that.
While it might not close this year we certainly expect it to close probably the first half of next year.
Mark Kaufman - Little Oak Asset
A follow on question if I could, operationally the decentralization of the -- well, operations basically, how is that proceeding?
Howard Cohen
Well, again, let’s be careful with the word decentralization. Its not that we move people to the field from head quarters.
What we did was we’re taking a look at better – a better buying and better understanding of the local markets and allowing the management that manages this local markets to have more influence in the products and the types of inventory that we carry so that we can satisfy the customer. We are spending much more time trying to understand what does the customer want and then trying the provide the products and services necessary at the local market even if that differentiates itself from a national perspective.
We’re at the beginning stages of that. So I don’t think we’re seeing any of that of those results in any of our performance numbers.
But as we move into the next couple of years and we better focus on penetration and going deeper into the accounts that we serve as well as trying to move into new accounts and are more consistent with what they are requiring us to provide them, I think you’ll see greater margins and a improved revenue performance growth than we have seen in the past.
Operator
Your next question comes from the line of Alan Weber with Robotti & Company.
Alan Weber - Robotti & Company
Howard, I believe you made a comment about in Phoenix, either I think you said you’re not in Phoenix or --
Howard Cohen
No, we’re not, we closed that facility. It was just an example of there are some markets especially a market like Phoenix where the majority of product goes one step versus two step.
So even though there is high growth in a market like that a company like ours even when we were in that market we were not seeing the kind of growth that we would look for nor do probably most of our competitors unless they’re shipping direct. So I was just using that as an example of what -- as we now look at the footprint of BlueLinx it’s not looking at the total market and saying that what the growth is, we’re trying to segment it to the MSAs so we really can take a look at what really our growth should be considering both what goes through one step what goes through the large home builders as well as what markets we can serve best with our distribution assortment.
Alan Weber - Robotti & Company
And I guess a follow up on that. Can you explain why certain markets don’t use two step distribution?
Howard Cohen
I wish they all did. You take a -- where there's mass, large mass home builders they have the power to go direct; they have enough inventory demand if they can skip the traditional channels; they still use us for fillers, but when they use us for fillers its obviously they’re using a local distributor for that filler that we supply, so as in the two step arrangement.
So we’re certainly going to do better in areas where there are smaller builders where they’re certainly more reliant on local distributors than they are on going direct for their products.
Alan Weber - Robotti & Company
Okay. In your comments I think you talked about highly competitive pricing environment.
I'm just curious if there is increased pricing pressure coming from is it your -- is it two step distributors that you’re competing with or are you seeing more going once -- of bypassing the two step distributor?
Howard Cohen
I don’t think I made a comment about pricing --
Doug Goforth
Well, yes, Howard, that was actually mentioned in the press release and the script. So, Alan, there is pressure certainly from home centered customers that we have and then there is competition particularly between two steppers on different products.
There are some specialty product that there is also been a lot of competition on like installation, and those are things that are keeping the margins compress.
Operator
Your next question is a follow up from David Williams with Williams Financial.
David Williams - Williams Financial
I appreciate you taking additional questions from me. I wanted to see if you could kind of touch on what you’re seeing within the retail channel knowing what your mix is there.
Are you seeing a stronger demand maybe coming out of the home centers and you talked about may be 7%, 8%, 9% growth but it seems like we’re definitely on uptick for the repair remodel part of the industry. Are you seeing that flow through and what are your expectations may be as we get into the next year?
Doug Goforth
Well, without getting specific on home centers I would say we include home centers and repair and remodeling but we have a lot of other customers that we classify in that as well. We had definitely seen an up take in demand in that really starting kind of in the late second quarter and early in the third quarter there has definitely been an uptick.
It's not the high numbers that a Howard puts out in studies saying seeing 18%, 19%, 20% its nothing like that.
David Williams - Williams Financial
Sure.
Doug Goforth
But we’re definitely seeing growth in that regard and it's continued to be relatively strong in October. There is going to be the normal seasonable slow down but October particularly repair and remodeling has continued to be fairly robust.
David Williams - Williams Financial
Great, thanks, and then one last one if I could here. Can you kind of comment about maybe how lumber prices impact your business?
And now that we’ve seen some stabilization in those lumber prices, what does that mean for you guys? Are you looking for prices to move up as we go through the, in the next year or what may be if you could kind of frame that?
Doug Goforth
Well, higher prices are always good for us particularly when they first start rising if we were positioned correctly with our inventory. In the third quarter, it was actually a rise in the, in lumber prices.
And lumber is our largest product code that we sell, so we move a lot of footage. So there was a pricing uptick there.
Your other structural wood products primarily were down on a year-over-year basis. In fact, OSP was down significantly.
So but lumber prices thereat they’re fairly high levels right now so we’re not necessarily anticipating any material increase in 2014, in fact, you could definitely see some compression, and I know Howard has spend a lot of time on structural products that are structural guys, he probably wants to interject on that.
Howard Cohen
Yes, especially as we get into the second quarter of next year you’re going to see a fairly dramatic decrease in pricing footage may improve because the pricing was so high it will be --
Doug Goforth
Well, probably more in the first quarter than the second quarter, first quarter you were at particularly all structural product, you were at close to eight year highs than most of the third quarter and then prices as you recall from our earnings release this second quarter that’s when they plummeted throughout the quarter. So there still be a little bit of hangover in the second quarter but you’ll really see it in the first quarter.
Howard Cohen
But I was really talking more about margins as we try to push through the products that we brought. Obviously, our margins took a significant hit in the second quarter but the pricing was in the first quarter.
Doug Goforth
Yes, and there is a certain amount of elasticity at least with the margin percentage that you’re going to get, David, because rising prices are good. If you are earning 10% you’re only going to be able to continue to earn 10% up to a certain level of pricing, and then that mark up is just not sustainable in the market.
I mean, if the competition is not doing that and so you will see some pressure on that. We’ve experienced some of that over some of our previous quarters here particularly when prices were rising in the fourth quarter of last year and the first quarter of this year you saw some margin compression although we were getting more margin dollars that percentage decrease.
Operator
There seem to be no further question at this time. I would now like to turn the conference back over to Cohen for closing remarks.
Howard Cohen
I like to thank everyone for their participation today and look forward to, not me, but we look forward to talking to you in the future. Thank you.
Operator
Thank you for your participation in today’s conference call. You may now disconnect.