Earnings Labs

BlueLinx Holdings Inc. (BXC)

Q4 2012 Earnings Call· Wed, Feb 13, 2013

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Transcript

Operator

Operator

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the BlueLinx’s Fourth Quarter 2012 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, Wednesday, February 13, 2013. Thank you. I would now like to introduce Maryon Davis with BlueLinx. Ms. Davis, you may begin your conference.

Maryon Davis

Management

Thank you, Regina. And welcome everyone to the BlueLinx’s fourth quarter 2012 conference call. Our speakers 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’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 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. We will begin the call this morning with opening remarks and an operations review from George. Then Doug will present an in-depth review of the financial statements. Lastly, George will add a final perspective before opening the call to your questions. Now, let me turn the call over to our Chief Executive Officer, George Judd.

George Judd

Chief Executive Officer

Thank you, Maryon. Good morning, everyone, and thank you for joining us. Before beginning our remarks regarding the fourth quarter 2012 results, I’d like to comment on our press release issued January 10, 2013, announcing a $40 million planned rights offering. As the housing market and general economic conditions continue to improve, the additional capital raised in the rights offering will allow BlueLinx to participate more fully in these improving conditions. We have filed the registration statement with the Securities and Exchange Commission, which contains a preliminary prospectus. As the right offering process is ongoing, we will not have any comments or take any questions regarding the offering. We will take questions at the conclusion of this call regarding the results and strategies. Thank you for your understanding and with that, I’ll begin the review of our fourth quarter and full year results. Those of you following along with the slides posted on the Investor Relation sections of the BlueLinx website. I’ll begin with slide four. The fourth quarter business environment improved as the underlying market fundamentals and leading indicators continue to strengthen, increasing the credibility of the housing market recovery. U.S. builders started work on homes in December at the fastest pace in over four years and finished 2012 was their best year for residential construction since the early stages of the housing crisis. According to the Commerce Department builders broke ground and homes in December at a seasonally adjusted annual rate of 954,000 units that is 12.1% higher than November’s annual rate and nearly twice the recession low reached in early 2009. Both single-family and multifamily starts increased in December and the pace of new home construction permits picked up to a four and half year high. Total housing starts in the fourth quarter increased approximately 36% compared…

Doug Goforth

Chief Financial Officer

Thank you, George. Good morning. Beginning on slide seven, overall sales for the fourth quarter ended December 29 totaled $440.3 million, up 12.6% or $49.2 million from the fourth quarter of 2011. This reflects a 5.4% increase in specialty product sales and an 18.9% increase in structural product sales from the year ago period. Fourth quarter sales mix was favorably impacted by increased structural product pricing compared to the year ago period with structural sales accounting for 44% and specialty sales accounting for 56% of total revenue during the quarter. The increase in total revenue is attributable to increased specialty unit volume and underlying structural product prices. Structural wood based product prices retreated early in the quarter and rose during the last two months of the quarter. Overall unit volume rose 2.9% compared to the same period a year ago, as specialty unit volume increased 5.4% and structural unit volume decreased 0.8% compared to the same period last year. BlueLinx generated approximately $52 million in gross profit for the quarter, up 8.7% from approximately $48 million in the year-ago period. Overall gross margin was 11.8% for the quarter, down from last year’s 12.3% as lower margin’s structural products sale increased from 41% of revenue to 44%, therefore representing a larger mix of total gross margin. Fourth quarter operating expenses of $56.7 million were up compared to $50.5 million for the same period a year ago and included $0.2 million and $3.9 million in net gains from real estate related items in 2012 and 2011 respectively. Excluding real estate related items, operating expense increased approximately 4.6% compared to the same period a year ago even while unit volume through warehouse distributional channel increased approximately 6.5%. We’re pleased with our performance in effectively controlling cost in 2012 and our management team remains…

George Judd

Chief Executive Officer

Thanks, Doug. I’d like to share a few observations before turning the call over to the operator for questions. As we move forward in 2013, we are confident in our ability to both increase our share of the market and maintain operating discipline that we have demonstrated over the last several years. We remain focused on providing dependable, high-quality service to our customers as the recovery of the residential construction market continues to accelerate. We are encouraged by economic forecasters who point to favorable outlook for household creation and new home construction. The consensus and forecasts we monitor, including those produced by research information systems and the National Association Of Homebuilders currently put housing starts in the range of approximately 900,000 to 1.2 million units for 2013. These same forecasters estimate continued growth in 2014. The outlook for some of our other end-use markets is also encouraging, with repair remodeling activity expected to increase throughout 2013 and with modest growth predicted for industrials and non-residential construction markets. In summary, the operating environment is improving and the housing market currently is showing significant signs of improvement. Our 2013 operating plan is based on expectations that our sales will significantly increase from 2012 levels, as the overall market for the products we distribute continues to gain momentum. Our plan is to maintain a strong gross margin level by continuing to focus on specialty product growth, and by effectively managing our structural business for profitability. In 2012, we achieved record gross margins of 12.1%, delivering a 20 basis point improvement in specialty gross margin and a 30 basis point improvement in structural. I’m very pleased with the strong margin performance in 2012. In addition, we’ll continue to effectively manage our operating costs as we have done over the last several years without diminishing…

Operator

Operator

(Operator Instructions) Our first question will come from the line of Mark Wilde with Deutsche Bank.

Mark Wilde - Deutsche Bank

Analyst · Deutsche Bank

Good morning, George.

George Judd

Chief Executive Officer

Good morning, Mark. How are you?

Mark Wilde - Deutsche Bank

Analyst · Deutsche Bank

Good. George, just as we see volume kind of picking up across the business, are you seeing any bottlenecks?

George Judd

Chief Executive Officer

What’s funny, Mark, it’s just that the Harvard Joint Center meeting in the last couple days and that was one of the roundtable discussion points that we talked about as a group of CEOs for around the industry. And the big bottlenecks, our labor that’s from the builder perspective and really from our perspective as well. Hiring qualified people, particularly for us drivers is a challenge and then we still have financing limits on the industry and availability for builders to fund the acquisition of new lots seems that the -- their one of the anchors that will have as the recovery comes forward will be that some of the A lots and the desirable markets are cleaned up and the time to get new lots developed in desirable locations is longer as communities have cut the support teams and the inspectors and all of those things that have been reduced due to recession. So it’s going to take a little while to ramp up. But I’ll tell you, you know everybody was very, very optimistic as with the last meeting that we had in the fall up in Harvard. The economists are more optimistic than the CEO’s, which is flip-flop from during the recession. But I think every CEO’s very optimistic that the housing recovery will rebound and those follow next. We’ll work through as prices go up and capacities are expanded.

Mark Wilde - Deutsche Bank

Analyst · Deutsche Bank

Okay. And I know you’re trying really focusing on the Specialty side of your business, but with housing picking up and let just say we moved back toward $1.5 million starts? Are the things you can do to kind of extract the most leverage possible from structural side of your business and will you grow with the rise in starts on that side of the business?

George Judd

Chief Executive Officer

Yeah. Absolutely, we talk about our structural business and growing and maintaining share that managing profitability. Our structural business is the fastest-growing portion of our business right now. We did expect that as we thought it would come earlier in the housing recovery. But our plan is to maintain our structural focus and that’s a big part of our inventory investment that we have today, just between price appreciation, and lumber and OSB in particular. And then demand increases, it’s -- we built our inventories and we are participating in the market.

Mark Wilde - Deutsche Bank

Analyst · Deutsche Bank

Okay. Two other questions, one is, just a relationship with Weyerhaeuser. I mean, historically, they’ve had a pretty big distribution business on their own. So can you just talk about how you sort of work with them, when you are presumably at the same time kind of competing with them in some markets?

Doug Goforth

Chief Financial Officer

Well, we’ve always been a customer of Weyerhaeuser even back when we were at Georgia-Pacific years and years and years ago. Freight such an important part of the business that sometimes it’s more advantage to procure product from the closure mill. But the new relationship is exciting to us because it’s engineered lumber. It’s their brand which is, they are the number one supplier in engineered lumber North America. We have never partnered with them on engineer level in our history until 2012 and we started that relationship in the Northeast in Bellingham, Massachusetts, our facility there when their distributor had some financial difficulties. It’s done very, very well. Our customers are excited about it. I saw some of the Weyerhaeuser guys this week. They are happy with our performance. We are happy with the results. So I think we’ve done a nice job for them and I expect that to continue.

Mark Wilde - Deutsche Bank

Analyst · Deutsche Bank

Okay. And just a last question on that engineered wood business, I know the kind of pricing in performance for the manufacturers is not been very good in that business and I know that some of the leading producers have been out there with price initiatives for March. Do you have any view on how that may or may not take hold?

Doug Goforth

Chief Financial Officer

Well, they need a price increase, when you look at OSB increases and vinyl increase, and raw lumber, timber increases, all the components have gone up but the assembled product hasn’t, so that doesn’t make a lot of sense. So we fully support the price increases in the market.

Mark Wilde - Deutsche Bank

Analyst · Deutsche Bank

Okay. Very good. Good luck in the first quarter and for the year.

George Judd

Chief Executive Officer

Thanks Mark.

Operator

Operator

Our next question will come from the line of Greg Cole with Sidoti & Company. Greg Cole - Sidoti & Company: Hi. Good morning, everyone.

George Judd

Chief Executive Officer

Good morning, Greg. Greg Cole - Sidoti & Company: Just a question on the specialty revenue side, I think the reason it’s been lagging of the large growth on the structural side is the roofing. Is that still the case?

George Judd

Chief Executive Officer

Yeah. I mean it’s definitely growing slower than the structural side. We had a tough year -- year-over-year comp in roofing as did everybody in the industry with 2011 storm issues and then the way 2012 came out with large roofing winter buys and price increases. It was kind of a messy year in the roofing business and it definitely did impacted some major business for us. And it’s a growing business for us. Greg Cole - Sidoti & Company: Okay. Do you have a -- do you have an estimate of what it would have grown this year without the roofing impacts?

George Judd

Chief Executive Officer

It’s hard to -- you’d like to know what the normal 2011 would have been right, so. The new housing roofing segment increased with starts, 20% or so but that storm damage was just so, so large in ‘11 and it was thankfully minimal in 2012, thankfully from the perspective of those affected by storms. The Sandy thing is just kicking in now in the industry. We just started to see the rebuild up. So that will have a little uptick in all the product lines but specifically roofing. So I don’t know, I didn’t do the analysis on what a year-over-year comparison would be without the storms but it affected the producers, it affected all of the distribution and affected the retailers as well. Greg Cole - Sidoti & Company: Okay. That’s fair. And then as we’re -- as you’re trying to get up to the 60%, how does that, I guess, how do you get there in such, I guess, a blooming market for housing over the next two years. Is this fare or do you want have to, I guess, do something on a very large scale to improve specialty revenue?

Doug Goforth

Chief Financial Officer

So we were within one point of 60% before the market actually started come back and the structural business comes back first, which we had expected and had communicated in previous calls. So if you take price, the price appreciation but particularly in finding lumber in OSB and consider that the impact on what that mix is and then just its structural comes first, I’m optimistic that our strategy will allow us to continue our migration toward 60% and beyond. As we grow our share in codes like roofing and product lines like roofing and product line likes molding and in our metal product line is very strategic to us as I talked about in the prepared comments. All of those -- all those lines see nice growth and I expect that to continue. Greg Cole - Sidoti & Company: Okay. Thank you very much.

Doug Goforth

Chief Financial Officer

Okay. Thank you, Greg.

Operator

Operator

There are no further questions at this time. I would turn the call back over to Mr. Judd for any closing remark.

George Judd

Chief Executive Officer

Okay. Thank you, Operator. Thanks for joining us and I look forward to talking to you in next quarters call.