BlueLinx Holdings Inc. (BXC) Q1 2017 Earnings Report, Transcript and Summary

Good morning. My name is Rochelle and I will be your conference operator today. At this time, I would like to welcome everyone to the BlueLinx First Quarter 2017 Investor Relations Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions]. Thank you, Ms. Poulos, you may begin your conference.

Thank you, Rochelle and good morning everyone. We appreciate you joining us for our first quarter 2017 earnings call. The earnings release and presentation slides for this call can be found in the Investor Relations section of the company's website at www.bluelinxco.com. Joining us on the call today are Mitch Lewis, Chief Executive Officer and Susan O'Farrell, Chief Financial Officer. I will also remind you that this presentation includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about future operations and financial performance. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from those provided, including, but not limited to those identified in our press release and discussed in our filings within the Securities Exchange Commission. Forward-looking statements speak only as of the date of this presentation and we undertake no obligation to revise them in light of new information. Today's presentation also includes references to non-GAAP financial measures. With that, I’ll turn the call over to Mitch.

Thank you Natalie and good morning. We’re happy to be able to report another good quarter at BlueLinx. We had $600,000 of net income for the first quarter. This is the first time we’ve been able to report positive net income in the first quarter since 2006. The good news is that it could have been even more. Our net income in the first quarter was negatively impacted by approximately $4.5 million through what was a very positive development for BlueLinx. We were able to work with our union in one of our facilities to agree to withdraw from a multi-employer pension plan. This agreement should enable BlueLinx to operate competitively in the local market while mitigating the risk of increased liability to the company from a multi-employer defined benefit plan. We anticipate that the annual pension related cash cost to BlueLinx should be relatively the same as it is today while we have alleviated a contingent liability to the company. During the quarter, we also continued to make progress in our efforts to reduce the company’s debt. We delivered on our previous commitment to pay our $60 million mortgage obligation early which was due in July. Susan will discuss the details but we are pleased with the progress we have made in reducing both our ABL and mortgage which collectively or approximately $111 million less than they were a year ago. Our adjusted EBITDA for the first quarter also reflected our continued progress as we modestly improved from the first quarter of 2016. We made $7.3 million in adjusted EBITDA, a $300,000 improvement from 2016 levels. We continue to move forward at BlueLinx as the first quarter of 2017 was our sixth consecutive quarter with year-over-year improvement in adjusted EBITDA. Our 2017 first quarter adjusted EBITDA performance was actually much better compared to the first quarter of 2016 when we considered the closures of our facilities as well as the product category reductions that took place late in the second quarter and into the third quarter of 2016. Those activities represented approximately $1.1 million in adjusted EBITDA in the first quarter of 2016. So on a comparable basis, we actually improved our adjusted EBITDA by $1.4 million. In the first quarter, we also continued our efforts to enhance our sales and marketing performance. We thought previously about our commitment to elevate our sales teams and the additional resources we’ve invested to augment our sales performance. In the first quarter, in addition to initiating a comprehensive training program for each BlueLinx sales associate, we also added a Senior Vice President John Tisera to lead our sales teams across the company. John has an extensive marketing and sales background and distribution in building products, having worked for GE , Stanley Works, HD Supply and most recently Annexure where John was the president of this $1.9 billion distribution business. John has hit the ground running and brings a high level of process improvement and professionalism to help our teams enhance our partnership with our customers as we work to maximize their sales and profitability. I did want to spend a moment discussing the Canadian softwood lumber tariff that was put in place last week. As many of you know that tariff averaged in the 20% range where products shipped into the United States for many Canadian mills. It appears that the US market may have anticipated a tariff in this ranges as there has not been an immediate increase in prices in the US lumber market since the announcement. Over the last few days, it appears that some of the Canadian mills are moving product to Asia which ultimately could impact supply in the United States market. However, we continue to see an increase in lumber from Europe and this increasing supply source may be helping to mitigate potential increases in the market. It remains early, but for now, we have not seen any significant movement in market pricing. The first quarter of 2017 continues the positive trend we’ve enjoyed now for almost two years. And yet the BlueLinx team remains motivated by the tremendous opportunities that lie ahead for our organization or improving but we have a long way to go. I’d like to thank our customers and suppliers for their support, as well as the entire BlueLinx team for their continued effort and positive results. And now I’d like to turn it over to Susan who will walk you through our financial performance for the first quarter in greater detail.

Thanks, Mitch and good morning everyone. It's a pleasure for me to speak with you today and to review our first quarter business results. On page seven, let’s review some of our highlights before we get into the more detailed review of our financial results. As Mitch just mentioned, our primary focus over the past year has been on strategic initiatives to delever the business and we’re very pleased with the successful results we experienced to date. Last year, we rationalized our local inventory assortment, closed five underperforming facilities and began monetizing select real estate properties, which we collectively refer to as our operational efficiency initiatives. As part of these initiatives during the first quarter, we sold two previously closed facilities and entered into three sale impact transactions. Our advancement against these initiatives resulted in the strong finish 2016 and even stronger beginning to 2017. Since announcing the deleveraging plan last year, we have reduced our debt principal balance by $111.3 million and met our July 2017 mortgage obligation of $60 million three months ahead of schedule. Net sales were $428.6 million for the quarter. Revenue for the quarter was negatively impacted by adverse weather in the New England area relative to the mild winter they enjoyed in 2016. Even with the impact of this wintery weather in a relatively strong area of the country for BlueLinx and the drag on our revenues due to the operational efficiency initiatives our total same-center net sales were up $9 million or 2.1% from this time a year ago. During the first quarter, same-center sales of our engineered wood products rose double-digits and sales of our wood based commodities for up over 9% led by the price and unit volumes. When we look at our first quarter performance gross margin increased 60 basis points to 12.7%. This is our highest gross margin on record for any quarter of BlueLinx. This record gross margin is driven by our margin enhancement activity offset by the strong market conditions within structural products, which impacted our product mix this quarter. Structural products grew from 40% to 45% of our business. We had a 40 basis points headwind on our overall gross margin rate even with the shift in our product mix to our traditionally more commodity type items, we still had record gross margin results for the quarter. In selling, general and administrative costs, we reduced our cost year-over-year especially in our general maintenance, fuel costs and personnel related costs. Mitch discussed the withdrawal from the multiemployer pension plan, which resulted in a one-time charge to SG&A of $4.5 million. We expect to continue making withdrawal pension payments similar to our current pension payments in the next 20 years. When excluding the effects of this derisking initiative, our SG&A costs were down $6.8 million versus $2.3 million as reported favorably increasing our bottom-line. Net income as reported for the quarter $0.6 million and we considering the 4.5 million one-time charge net income would have been $5.1 million. Our adjusted EBITDA was $7.3 million for the quarter up $0.3 million or 4.4% from this period a year ago. Again another highlight for BlueLinx is this is our best first quarter adjusted EBITDA since 2007. When excluding our operational efficiency initiative, adjusted EBITDA on a same centre basis was up $1.4 million or 23.5% from first quarter 2016. We are delighted to see the year-over-year improvements in our first quarter results. Our trailing three months cash cycle days also reflected improvement. For the first quarter 2017, our cash cycle days totaled 55 days, a four day improvement compared to the first quarter of 2016 and an 11 day improvement for the first quarter of 2015. Operating working capital also improved by $56.1 million, this improvement primarily reflects our improvement in working capital components including a decrease in inventory of $31.8 million, a decrease in receivables of $21.4 million. We continued to work hard in improving our working capital processes and are pleased with the progress we’ve made. All the while staying focused on our inventory stock and ensuring we have just in time inventories where our customer needs. With the working capital efficiencies we’re gained to date, we are pleased to share that we’ve had over $73 million in excess availability under our revolver which is up over $12 million from prior year based on the qualifying inventory and receivable levels at year-end. With lower working capital on our revolver and an interest only mortgage we also incurred $2 million less interest expense during the quarter versus the same time a year ago. Our debt principle balance is down $111.3 million from the first quarter 2016. As mentioned earlier, this is significant progress on our deleveraging initiative. Also on the balance sheet, you’ll notice the impact of our three sale leaseback transaction as well as the pension withdrawal and the other noncurrent liability section is a $23.5 million increase from 14.5 million at year-end to $38 million at the end of the first quarter. This was driven by $11.7 million for deferred gains on the sale leaseback transaction as well as $7.9 million for the capital leases. And finally $4.5 million for the pension withdrawal liability offset by a few small other changes. As we move to slide eight, our mortgage principal was down $60 million and our ABL debt balance is down $51.3 million from this time a year ago, mainly driven by our working capital efficiencies and successful execution against our real estate monetization plan. With the sale of five facilities during the quarter, we were able to fully satisfy our July 2017 mortgage obligation on April 1st 2017. As the strength of the company continued to improve, we have more and more options available to us to unlock the value of our real estate. Our real estate continues to prove to be a valuable and attractive asset and our previous debt appraisals are substantiated by the sales that we have experienced over the past 10 months. With our outstanding mortgage balance of $99.4 million, we are exploring additional sales on leaseback transaction as well as alternative mortgage refinancing options to continue to improve the company’s capital structure and to delever the company. In conclusion, I would like to thank our BlueLinx team for their hardwork and efforts. Your contributions have resulted in the record results that we were able to share today and of course special thanks to our customer and suppliers for their continued partnership. And now Rochelle I’d like to open it up for any questions we might have at this time.

[Operator Instructions]. And your first question is from the line of Alan Weber with Robotti Advisors.

Good morning.

Morning.

So could you talk about you know you mentioned, you kind of adjusted the revenues and the gross profit for facilities that you closed and products that you discontinued. Can you do the same for regarding the operating expenses or SG&A?

When we have our Q that we're filing this afternoon it gives you a little bit more color on that. One thing just to think about Alan, if you look at that some of the cost to serve of what we delivered from gross margin last year moved into operating expense from a year ago, so we have that information. It was about, as we look at it just over $4 million for the closed centers and the exited items about 800,000.

So say that over again $4 million of expenses.

.:

Okay. And just my other question was the gross profit as a percent. Is there a seasonality to that, because I know you talked about structural products? Just wondered because the gross profit as you kind of with just, like the gross profit that you show was higher than last year’s gross profit and just trying to understand again is there something seasonal exits going to the improvements you’re making?

Overall, when we look historically, it’s not seasonal per se, if you think about summer versus winter. From that point of seasonality, there is certainly market cycles that we go through. But from a seasonality, I wouldn’t see it from that point of view.

So the improvement we believe this is, certainly has a lot to do with the efforts that we’ve been talking about for the last few year. And really focusing in the organization enhancing the gross margin and focusing, I’m looking at the variable contribution margin.

Okay. And just my last question is. Mitch you talked about the hiring [indiscernible] or kind of missed that?

Yes. On the person, we hired John Tisera coming to basically take over responsibility of all sales and marketing pretty organization. So our regional Vice President report directly to international sales Vice President reports directly to Head of the Sales excellence reports directly. So he basically has generally P&L responsibility for the organization, particularly emphasis on the sales and marketing in the business.

And hasn't that kind of factoring, when you’ve talk in the past about the more decentralized operations?

Yes. So clearly is a balance and John is there to lead not to micro manage. So he's come in basically to help to processes, best practices across the company, pricing discipline, training strategy, all of those activities. He's not in at all to micro manage So, as we talk about in the past, three years ago we had 22-23 of our General Managers located in Atlanta or Denver. Now we have two GMs across the country that are out of market. So we clearly putting our General Managers responsible for the P&L in the local markets and giving them the autonomy and the authority and the accountability to drive their business and John is just here to help lead and augment that activity.

Okay, great. Thank you very much.

[Operator Instructions]. And your next question is from the line of [indiscernible] with [indiscernible] Capital.

Good morning. Just a quick question on topline growth, historically the company has trended fairly closely with single family home starts and I was wondering as you look over the next year or two as you sort of normalize on home starts if you started to see good growth on how you see topline growth trend versus historical norm?

You’re not going to like my answer but we don’t give guidance, future guidance as it relates to sales. I can give you some color on the history which we expect the future to be different in that as we came into this business, the new management and the executive team couple of years ago the emphasis was you know righting the ship, changing from a cultural standpoint of focus not on top line but on return on invested capital which we’ve done and we still have a primary and specific business to delever. Part of the investment that we’ve talked about we started making in a big way and truly John coming in as well, there is another investment. There is all focused around enhancing our market share and if there is an elevating the teams that we have. So we would certainly expect when you look at the business historically versus going forward that we will perform better certainly relative to what’s going on in the underlying market.

Okay. And I guess the other question I have is if you look at the sequential growth, the topline growth was actually fairly strong sequentially after a good Q4. And I was wondering was that an anomaly from your standpoint, was that something going on with the business since Q1 tends to be lower than Q4 historically I believe.

So I don’t there is anomaly in what happened in Q4 at all. I mean there were a couple of things going on in the first quarter this year while the winter across the country obviously was generally mild, for us we have a good strong presence for example in New England in the Buffalo market in that area of the country which relative to a very mild 2015 was worse. We’re starting to see significantly improved performance relative to the first quarter in those areas of the country. So that was impacting it, the other point I would make is that we are always looking closely now at where we want to participate from a return perspective and sometimes that will impact the business as well. But nothing was going on specifically in the fourth quarter.

Okay, thank you.

[Operator Instructions] And there are no other questions at this time.

Okay, thank you Rochelle and thanks again for your continued interest in BlueLinx and we look forward to sharing our second quarter results with you in the months ahead. Have a great day.

This concludes today’s conference call. You may now disconnect at this time.