A "glut of inventory" in some markets depressed lumber prices during the second quarter and resulted in a smaller customer base in which contractors were ordering materials on a job-by-job basis, Builders FirstSource (BFS) CFO Charles Horn told analysts today.
Horn's comments came a day after, the Dallas-based LBM titan reported its net loss shrank by half in the second quarter to $22.6 million from $45.9 million in the year-earlier period on a 37.8% drop in sales to $175.5 million. The eighth-largest U.S. dealer also said it had closed its Ohio market operations--units in Cincinnati and Mason, Ohio, as well as one across from Cincinnati in Erlanger, Ky.
Horn said the excess inventory came from Stock Building Supply and Building Materials Holding Corp. (BMHC), both of which filed for Chapter 11 bankruptcy protection during the second quarter. As the two rival dealers closed locations, they shifted inventory to markets where they remained in business: in some cases, markets where they were also in head-to-head competition against BFS.
"It's unusual to have two big suppliers file for bankruptcy in the same quarter," Horn said.
Horn said BFS did not see the Ohio market rebounding enough to warrant the company's presence there, drawing a direct comparison to Florida. "We know Florida will return and be where it needs to be," he said. "Not Ohio."
The CFO noted that during the quarter BFS bought out leases for discontinued operations in Ohio and New Jersey, where it closed locations earlier this year, and "reduced future (lease) obligations by over $9 million."
Asked if there are any other markets that might share the same fate as Ohio in BFS's business strategy, Horn replied, "I would say no at this point. We are comfortable with our existing footprint." BFS now has 78 units in 11 states, mainly in Texas and the Southeast.
According to its quarterly financial report, BFS was able to trim its loss in part by reducing its overhead. Selling, general and administrative expenses dropped 32.3% to $24 million. Average full-time headcount for the quarter shrank 40.5% from the year-earlier period to reach 3,090, the company said.
Gross margin climbed a bit to 22.3% from 21.7%, or a 0.6 percentage-point rise. Price accounted for 1.8 points of that increase, but volume took away 0.9 point and there was another 0.3-point setback from a shift in sales mix toward lower-margin installed product sales.
Year-over-year activity in every major product category shrank during the second quarter: sales of prefabricated components dropped 34.9% to $35.1 million, window and door sales sank 38.8% to $43 million, sales of lumber and sheet goods dropped 43.4% to $39.5 million, millwork sales fell 37.6% to $18.9 million, and sales of other building products and services declined 33% to $40 million.
"The challenging environment facing the housing industry continued through the second quarter of 2009," Floyd Sherman, BFS' CEO, said in a statement issued Thursday. "... Our action plan of conserving cash, growing market share, reducing physical capacity, adjusting staffing levels, implementing cost containment programs, and prudently managing credit continues to help us successfully mitigate the impact of the depressed housing market on our operations.
"For the current quarter our net cash used was only $2.2 million, excluding a $20 million repayment on our revolving credit facility and the $31.8 million federal income tax refund received during the quarter," Sherman continued. "This is down from net cash used of $6.6 million during the second quarter of 2008, and was achieved on $106.8 million less sales. Market share gains and further penetration into the multi-family and light commercial segments reduced our sales decline compared to the second quarter of 2008 by an estimated 9%."
"From a capacity standpoint, we closed three locations during the current quarter, all related to our Ohio operations," Sherman continued. "Our average full-time equivalent headcount for the quarter was 3,090, down 40.5% from the second quarter of 2008. ... Our bad debt expense was $0.6 million for the quarter, down from $1.7 million in the second quarter of 2008."
During the analysts' call, Horn said BFS expects the second half of 2009 to "remain stable but increase that much. Our feeling is that we will see moderate growth in 2010 and more pronounced growth in 2011."
The latest results push BFS' net loss for the first six months of this year to $53.2 million compared with $61.8 million in the year-earlier period. That's on a 37.1% decline in sales to $335.1 million.